The Global Trade in Smuggled Cigarettes DIGITAL NEWSBOOK

RUSSIA UNITED KINGDOM EUROPE NORTH CANADA KOREA PAKISTAN CHINA UNITED CYPRUS STATES ALGERIA THE UAE PHILIPPINES

PANAMA NIGERIA SINGAPORE

BRAZIL Smuggling Routes PARAGUAY SOUTH AFRICA ARGENTINA

International Consortium THE CENTER FOR PUBLIC INTEGRITY Investigative Journalism in the Public Interest ICIJ of Investigative Journalists Show Contents Tobacco Underground ©2009 Center for Public Integrity Table of Contents About the Tobacco Underground Project Project Credits About ICIJ and The Center for Public Integrity

OVERV IEw Article 1

PAT R One: THE NEW SMUGGLERS Europe Made To Be Smuggled: Russian Contraband Cigarettes 2 ‘Flooding’ EU Going Undercover: Inside Baltic Tobacco’s Smuggling Empire 3 Ukraine’s ‘Lost’ Cigarettes Flood Europe: Big Tobacco’s 4 Overproduction Fuels $2 Billion Black Market China China’s Marlboro Country: A Massive Underground Industry 5 Makes China the World Leader in Counterfeit Cigarettes Smoking Dragon, Royal Charm: A Tale of Four FBI Agents, 6 62 Chinese Smugglers, and a Billion Bogus Cigarettes South America Smuggling Made Easy: Landlocked Paraguay Emerges as a Top 7 Producer of Contraband Tobacco When Cracking Down Seems Impossible: Paraguay’s Corruption 8 Fuels a Criminal Economy

N orth America Article Canada’s Boom in Smuggled Cigarettes: Indian Tobacco 9 Factories, Organized Crime Control a Billion-Dollar Black Market Big Tobacco’s New York Black Market: How America’s Top 10 Cigarette Firms Fueled a Billion-Dollar Underground Trade ‘The Guy in the Wheelchair’: How an El Paso Smuggler Moved 11 a Half Billion Cigarettes Across America SMOKE2U: Tobacco Sales Take Off in Cyberspace 12 T errorists and Insurgents Terrorism and Tobacco: Extremists, Insurgents Turn to Cigarette 13 Smuggling The Taliban and Tobacco: Smuggled Cigarettes Give Boost 14 To Pakistani Militants

PAT R Two: BIG TOBACCO’S LEGACY The Montenegro Connection: Love, Tobacco, and the Mafia 15 Djukanovic’s Montenegro a Family Business: As EU Membership 16 Looms, So Do Troubling Questions Blame the Distributor: How Gallaher Stayed in the Smuggling 17 Game How To Get Away With Smuggling: Canada’s Billion-Dollar Deal 18 for Big Tobacco Tobacco Companies Linked to Criminal Organizations in Lucrative 19 Cigarette Smuggling

GLSAOS RY

On the Web

Tobacco Underground is a project of the International Consortium of Investigative Journalists. Working with reporters in more than a dozen countries, ICIJ is charting the frontlines of the illicit traffic in cigarettes.

PROJECT STAFF David E. Kaplan, editor Marina Walker Guevara, deputy editor Andrew Green, web editor Cole Goins, deputy web editor Ariel Olson Surowidjojo, multimedia editor Sarah Laskow, audio editor Peter Newbatt Smith, research editor Laura Cheek, Paulette Garthoff, fact-checking Sara Bularzik, copy cditor Gordon Witkin, Tom Stites, additional editing Steve Carpinelli, communications

REPORTING TEAM Mirsad Brkic (Bosnia-Herzegovina), Stefan Candea (Romania), Duncan Campbell (United Kingdom), Svjetlana Celic (Bosnia-Herzegovina), Patricia Chan (Hong Kong), Te-Ping Chen (United States), Gong Jing (China), Alain Lallemand (Belgium), Aamir Latif (Pakistan), Vlad Lavrov (Ukraine), William Marsden (Canada), Miranda Patrucic (Bosnia-Herzegovina), Paul Christian Radu (Romania), Mabel Rehnfeldt (Paraguay), Roman Shleynov (Russia), Leo Sisti (Italy), Daniel Santoro (Argentina), Marcelo Soares (Brazil), Drew Sullivan (Bosnia-Herzegovina), Kate Willson (United States).

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DIGITAL NEWSBOOK DESIGN This Digital Newsbook was produced for the Center for Public Integrity by the Donald W. Reynolds Journalism Institute at the Missouri School of Journalism in Columbia. www.rjionline.org

ADDITIONAL THANKS El Paso Inc. Le Soir Novye Kolesa ABC Color

FUNDING AND SUPPORT The Center for Public Integrity relies on grants and donations to support its work. The ICIJ Tobacco Underground project is generously supported by a grant from the Johns Hopkins Bloomberg School of Public Health. In addition, organizational support is provided by Carnegie Corporation of New York, the Ford Foundation, Greenlight Capital LLC Employees, the John D. and Catherine T. MacArthur Foundation, the Open Society Institute, the Park Foundation, the Rockefeller Brothers Fund, and other generous institutional and individual donors. The Tobacco Underground project is also grateful for pro bono assistance from PIERS (Port Import Export Reporting Service), the primary source of U.S. waterborne import-export trade data.

The International Consortium of Investigative Journalists (ICIJ) was launched in 1997 as a project of the Center for Public Integrity to globally extend the Center’s investigative style of journalism in the public interest. Based in 50 countries, ICIJ’s global network includes 100 of the world’s top investigative reporters who produce collaborative, cross-border reports on major global issues around the world. Since its founding, ICIJ has released a series of groundbreaking reports with global impact, including stories on tobacco industry collusion with organized crime, the war profiteering of Haliburton and other contractors in Iraq and Afghanistan, the privatization of scarce water resources, and political lobbying payments by unsavory governments. ICIJ also supports international investigative journalism by presenting the biennial Daniel Pearl Awards for Outstanding International Investigative Reporting.

About the Center

The Center for Public Integrity is a nonprofit, nonpartisan, and independent digital news organization specializing in original investigative journalism and research on significant public policy issues. Since 1990, the Washington, D.C.-based Center has released more than 475 investigative reports and 17 books to provide greater transparency and accountability of government and other institutions. It has received the prestigious George Polk Award and more than 32 other national journalism awards and 18 finalist nominations from national organizations, including PEN USA, Investigative Reporters and Editors, Society of Environmental Journalists, Overseas Press Club, and National Press Foundation.

t a beg n with a basic math- ernment inquiries, lawsuits, and ematical equation: In 1995 two promises of a global treaty to crack Ischolars in Europe found that down on the illicit cigarette trade. almost one-third of the world’s ciga- Since 2004, two major tobacco rette exports had simply vanished. companies, Philip Morris Interna- Somehow, billions of cigarettes, tional and Japan Tobacco Interna- once exported, had mysteriously tional, have agreed to pay a com- gotten lost in transit. bined $1.65 billion to the European Only it wasn’t that mysterious. Community and 10 member states Starting in 1999, a team of report- to settle litigation that would have ers from the International Consor- further exposed their involvement tium of Investigative Journalists in cigarette smuggling. They have (ICIJ) pored over thousands of in- also committed publicly to help ternal industry documents and un- fight trafficking in tobacco. Simi- covered how leading tobacco com- larly, this July, Canada’s two largest panies were colluding with criminal cigarette companies, Imperial To- networks to divert cigarettes to the bacco Canada and Rothmans Inc., world’s black markets. Big Tobacco pleaded guilty to aiding smuggling was doing it for profit — to boost during the early 1990s; they are to sales and gain market share — as it pay a combined $1.12 billion, the avoided billions of dollars in taxes largest such penalties ever levied in while recruiting growing numbers of Canada. smokers around the globe. The to- Yet, despite the exposés, the bacco industry, as it turned out, did lawsuits, and the settlements, the not merely turn a blind eye to the massive trade in contraband to- smuggling — it managed the trade bacco continues unabated. Indeed, at the highest corporate levels. with profits rivaling those of nar- Those revelations, and others cotics, and relatively light penal- that followed, helped lead to gov- ties, the business is fast reinventing

3Artcl i e 1 of 194 Show Contents 5Pg a e 1 of 56 Tobacco Underground ©2009 Center for Public Integrity itself. Once dominated by Western largely been curtailed, the situation multinational companies, cigarette remains murky in Africa and other smuggling has expanded with new developing areas of the world. players, new routes, and new tech- In late June 2009, smuggling niques. Today, this underground experts, customs officials, and industry ranges from Chinese coun- diplomats from an estimated 160 terfeiters that mimic Marlboro ho- countries gathered in Geneva, lograms to perfection, to Russian- Switzerland, to push for what has owned factories that mass produce eluded governments for decades: brands made exclusively to be a global crackdown on the black smuggled into Western Europe. In market in tobacco. Under the aus- Canada, the involvement of an ar- pices of the WHO’s three-year-old ray of criminal gangs and Indian Framework Convention on Tobacco tribes pushed seizures of contra- Control — a global treaty to curb band tobacco up 16-fold between tobacco use — delegates worked to 2001 and 2006. “The big companies implement a protocol to stop ciga- know that to some extent the gold- rette smuggling. But the proposed en period of smuggling is gone,” measures face plenty of challenges, observes Belgium-based sociologist with some countries showing lim- Luk Joossens, a World Health Orga- ited concern over the issue, while nization expert on tobacco smug- others, including the United States, gling and co-author of the 1995 have so far refused to ratify the study that first alerted the world FCTC altogether. that billions of exported cigarettes The stakes are formidable. Ex- had gotten lost in transit. “You have perts estimate that contraband ac- still the normal small-scale smug- counts for 12 percent of all cigarette gling, but you also have counterfeit sales, or about 657 billion sticks production, illicit manufacturing… annually. The cost to governments and a lot of small companies that worldwide is massive: a whopping are involved. So the whole area of $40 billion in lost tax revenue annu- illicit trade has become much more ally. Ironically, it is those very taxes complex.” Joossens also said that — slapped on packs to discourage while Big Tobacco’s participation smoking — that may help fuel the in cigarette smuggling in Western smuggling, along with lax enforce- Europe and North America has ment and heavy supply. (A pack of

3Artcl i e 1 of 194 Show Contents 5Pg a e 2 of 56 Tobacco Underground ©2009 Center for Public Integrity a leading Western brand that costs Perhaps even more troubling is little more than $1 in a low-duty the impact that smuggling has on country like Ukraine can sell for up the public health crisis caused by to $10 in the U.K.) That potential tobacco. Worldwide, one out of 10 profit offers a strong incentive to adults dies prematurely from to- smugglers. bacco-related diseases such as lung But it is more than lost revenue cancer, emphysema, cardiovascu- that is at risk. Illicit tobacco feeds lar disease, and stroke. If current an underground economy that sup- trends hold, tobacco will kill about ports many of the most violent ac- 500 million people currently alive. tors on the world stage. Organized By 2030, that figure will reach 8 crime syndicates and terrorist million deaths a year, and with groups such as the Taliban and Hez- cigarettes being heavily marketed bollah facilitate in poorer countries, 80 percent of Organized crime global distribu- those deaths will be in the develop- syndicates tion and use ing world. Over the 21st century, and terrorist the profits to say health experts, an estimated groups such as finance their ac- one billion people could die from the Taliban rely tivities. In Cana- tobacco use. da alone, police At a time when nations are in- on cigarette believe that 105 creasingly trying to crack down on smuggling to organized crime smoking, smugglers put cheap ciga- help finance groups are en- rettes into the hands of those most their activities. gaged in the vulnerable — young people and the illicit tobacco poor. In addition, the trade is push- trade, including motorcycle gangs ing the supply steadily into the black and the Italian Mafia. Criminal or- market, selling cut-rate cigarettes ganizations “are doing more than of often dubious quality. Of special just smuggling cigarettes,” notes concern is the advent of a massive John W. Colledge, who oversaw counterfeiting industry. Once a mi- international tobacco smuggling nor problem, today underground programs at the U.S. Customs Ser- factories in China, Paraguay, and vice between 1999 and 2002. “They Eastern Europe manufacture lit- are engaged in human, drugs, and erally billions of fake cigarettes weapons trafficking.” — Marlboros, Camels, 555s, Mild

3Artcl i e 1 of 194 Show Contents 5Pg a e 3 of 56 Tobacco Underground ©2009 Center for Public Integrity Sevens — an uncontrolled industry trade zones and other shipping cen- that law enforcement is only begin- ters, which allows for temporary tax ning to grapple with. Many of the suspension while the tobacco is en smokes are made from the lowest route to a third country. As a result quality tobacco, full of stem and of lax controls, cigarettes get “lost” sawdust, and spiked with unusually along the way, with huge numbers high levels of nicotine. Other packs failing to arrive at their intended contain far worse. Tests reveal that destination. Cigarettes, for exam- counterfeit ciga- ple, may sit for weeks in free trade Counterfeit rettes carry a zones in Panama or Dubai until they cigarettes have bevy of products are sold. Then they pass quickly tested positive that could fur- through multiple buyers in a short for a range ther shorten even period of time, complicating efforts a heavy smoker’s to identify where “leakages” occur. of dangerous life: metals such On occasion, cigarettes are even ingredients, as cadmium, pes- illegally sold at sea, where vessels from arsenic to ticides, arsenic, offload them to smaller boats that rat poison. rat poison, and take them to shore. In the Balkans, human feces. they are sold by the trunk-load to Despite the stakes, cigarette smugglers who line their cars up at smuggling remains a tough crime the borders of the European Union. to investigate and prosecute. Fac- And in the United States, tobacco tories are set up in regions of the suppliers ship millions of the tax- world with weak controls and high free smokes to Indian reservations, levels of corruption, such as the where they are unloaded to smug- crime-ridden Russian exclave of glers, bootleggers, and online mer- Kaliningrad, Guangdong province chants. in China, and South America’s no- Despite its broad impact on torious Tri-border area between Ar- health, crime, and taxes, tobacco gentina, Brazil, and Paraguay. The smuggling receives strikingly little distribution systems are complex, attention from authorities. Lenient the smuggling routes circuitous and sentences are the norm; in some hard to track. countries, cigarette smuggling is Smugglers take advantage of not even considered a crime. Nor an “in transit” system used in free is it a priority for law enforcement

3Artcl i e 1 of 194 Show Contents 5Pg a e 4 of 56 Tobacco Underground ©2009 Center for Public Integrity agencies, even in the West, which in some 30 countries. The stories spend the majority of their resourc- have been used by law enforcement es tackling drug, arms, and terror- officials, tobacco control activists, ism cases. In the United States, for and tobacco industry officials in- example, the Bureau of Alcohol, tent on cleaning up their industry. Tobacco, Firearms and Explosives In 2009, Tobacco Underground was devotes a paltry two percent of its honored with two major journalism personnel and budget to tobacco awards: The Tom Renner Award programs. for Outstanding Crime Reporting Seven years after its original se- from Investigative Reporters and ries on tobacco smuggling, ICIJ as- Editors, and the Online Journalism sembled a new team of reporters Award for Best Web Coverage of to illuminate this shadowy transna- International Affairs from the Over- tional business. Based on reporting seas Press Club. from 15 countries, our new project Our work on the issue continues, looks at the influence of organized and you can help. Have a tip on the crime and terrorist groups, as well illicit tobacco trade? Send ideas to as the continued complicity of dis- [email protected]. n tributors, wholesalers, and tobacco companies themselves. Since 2008, Marina Walker Guevara is deputy the series has exposed the billion- director of the International dollar smuggling of Russian-made Consortium of Investigative Jin Ling cigarettes to the European Journalists, a project of the Union; the involvement of North Center for Public Integrity. American Indian reservations in a massive black market in Canada and the United States; and the alleged role of Montenegro Prime Minister Milo Djukanovic in a decade-long smuggling scheme with the Italian Mafia. The response has been gratifying. Tobacco Undergound has received worldwide attention, drawing coverage in at least a dozen languages

3Artcl i e 1 of 194 Show Contents 5Pg a e 5 of 56 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity Made To Be Smuggled RssianCntrabandu o Cigarettes ‘Flooding’ EU By Stefan Candea, Duncan Campbell, Vlad Lavrov, and Roman Shleynov Published Online | October 19, 2008

up ro e is being The organization be- flooded by smug- hind this fast expanding Egled Russian-made black market, the Baltic cigarettes worth at least Tobacco Factory (BTF) $1 billion a year, an inter- of Kaliningrad, Russia, has national investigation has links to two of the world’s discovered. largest tobacco compa- A network of facto- nies. Its factory network ries and routes has been in Russia and Ukraine was put together across Eu- previously owned and run rope since 2004, follow- by subsidiaries of Japan ing large-scale smuggling Tobacco International routes previously supplied Jin Ling’s (JTI) Group, the world’s by major multinational distinctive yellow number three producer. tobacco companies. The packaging closely The investigation has new underground smok- resembles that of identified a network of Camel cigarettes. ing trade involves only one Russian and East Euro- Credit: Paul Radu. brand, Jin Ling, which is pean companies, including turning up in more cities and coun- 5 factories believed to play roles in tries across Europe every month. manufacturing the contraband ciga- Jin Ling, virtually unknown to rettes being smuggled to the West. the authorities three years ago, has The Russian-run factory network grown so rapidly that law enforce- now claims to be able to produce ment officials say it now rivals Marl- more than 24 billion cigarettes an- boro as the top smuggled brand be- nually. This would be equivalent to 7 ing seized in the European Union percent of legal EU cigarette imports.

3Artcl i e 2 of 194 Show Contents 5Pg a e 1 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity Originally imported from China, national Consortium of Investiga- Jin Ling features a king-size packet tive Journalists (ICIJ), a non-profit design that closely resembles the le- network of independent journalists gal Camel brand in color, typestyle, who first exposed the complicity and layout. Instead of a camel, the of Big Tobacco in smuggling eight packs are illustrated by a mountain years ago. Relying on corporate goat. records, customs data, and under- Jin Ling cigarettes have no legal cover reporting from inside the market in any main Jin Ling production center, “Jin Ling European coun- ICIJ’s team has pieced together the is the most try, according unique story of the world’s first ever disturbing new to customs offi- cigarette brand designed and manu- development cials. The brand factured only for smuggling. is never adver- in the illegal tised and can- OPERATION BALTIC tobacco trade… not be bought in The cigarettes shops. It is only Baltic Tobacco Factory’s headquar- are flooding into sold illegally — ters is in Kaliningrad, a slice of Rus- Europe.” smuggled by sian territory annexed by the Soviet — Luk Joossens, gangs who hope Union after World War II and wedged to pocket im- between Poland and Lithuania. The World Health mense profits freewheeling Russian exclave is Organization by selling unli- known as a hotspot for smuggling expert censed, untaxed and organized crime. In the city of cigarettes on Kaliningrad, the regional capital, black markets across Europe. Baltic Tobacco’s eight-acre complex “Jin Ling is the most disturbing of factories, offices and warehouses new development anywhere in the is discreetly set back from main world in the illegal tobacco trade,” roads. From the riverbank, an un- according to Luk Joossens, a World marked wandering track leads even- Health Organization expert in to- tually to the company’s three-story bacco smuggling. “They are flooding red-brick office block. No signs or into Europe.” nameplates mark or identify the fac- The ten-country investigation tory or the office buildings. of Jin Ling was done by the Inter- From Kaliningrad, BTF’s ciga-

3Artcl i e 2 of 194 Show Contents 5Pg a e 2 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity rettes are smuggled by the billion “Jin Ling cigarettes are being le- directly through Poland, or routed gally manufactured in Russian fac- more circuitously through Lithua- tories but are intended for the Euro- nia, Latvia, Belarus, and Russia. Of- pean illegal market,” says smuggling ficials at Baltic Tobacco recommend expert Joossens. “It’s a unique new sea routes to their clients, as they problem.” can deliver containers direct and The rise in Jin Ling traffic coin- tax-free to Kaliningrad’s port. They cides with significant reported falls also offer shipments from their Lviv in seizures of legal but untaxed to- factory in Ukraine, through the bacco products exported from West- Black Sea port of Odessa. ern producers. Manufacturers such Overland to Germany, and from as Philip Morris, JTI-Gallaher, and Baltic or Black Sea ports, the ciga- Britain’s Imperial Tobacco Group rettes are passed to criminal net- have come under intense interna- works in at least 12 countries — Ger- tional, public, and political pres- many, the United Kingdom, Poland, sure to “clean up their act” and curb Latvia, Romania, Greece, Turkey, sales to illegal channels and smug- Italy, Bulgaria, the Netherlands, Bel- gling centers such as Kaliningrad. gium, and France. The scale and striking growth of None of the packs contains the Jin Ling smuggling has marked it as correct large mandatory health a major new development in orga- warning notices now compulsory in nized crime, prompting European all EU states, making their illegality customs agencies to respond by clear. Some Jin Ling packs found in launching “Operation Baltic” early Europe, however, sport “duty free” in 2008. Officials at the EU’s Anti- stickers, or meaningless Russian tax Fraud Office (OLAF) have assigned paid stamps, apparently as a market- an international task force to the Jin ing tactic to confer prestige and cred- Ling problem. The smuggling of Jin ibility on the product. BTF is believed Ling has “become a huge problem to print the “duty free” labels them- in the EU causing substantial losses selves, to make their black market to both national and EU budgets,” handiwork appear as leakage to the OLAF said in response to inquiries “gray market” — as if the cigarettes from ICIJ. are simply an unauthorized diversion To investigate the Baltic Tobacco of otherwise legitimate goods. Factory, ICIJ reporters went under-

3Artcl i e 2 of 194 Show Contents 5Pg a e 3 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity cover and visited its Kalinin- grad plant in June 2008. Pos- ing as smugglers setting up a new route to the EU, they carried concealed video and recording equipment. BTF officials proved eager to help their prospective new clients. At the company’s main factory, the undercover team was offered Jin Ling by the container — each one filled with over 10 million cigarettes. “We don’t care” what happens to the cigarettes, Dmitry Gyrja, BTF’s logistics Customs officials inspect a stash of manager told the reporters. contraband Jin Ling cartons in Germany. “According to Russian law it In 2007, 258 million Jin Ling cigarettes doesn’t matter. All the trans- were seized throughout the European portation arrangements are Union. Credit: Zollkriminalamt (Customs up to you…” With payment Investigation Bureau, Germany). in advance, he added, a container could be ready and waiting in — which black market cigarettes two weeks. usually sell for — the profits would Their price per container: be immense. $102,500 (£59,000 or €73,000) — The fat profit margins rival those about one cent per cigarette. If the from narcotics and justify elaborate contents of one container reached and costly concealments, the use of Sweden or Germany and were sold complex and circuitous routes, the at full legal price, they would be payment of substantial kickbacks to worth $3.2 million (€2.3 million). In corrupt police and customs officers, Britain or Norway, where cigarette and the hiring of enforcers. taxes are high, the same shipment Since 2005, European customs would be worth nearly $6 million agencies monitoring trade across (€4 million). Even at half the price the EU’s eastern borders have

3Artcl i e 2 of 194 Show Contents 5Pg a e 4 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity seized rapidly increasing quantities ing the EU was discovered by Polish of Jin Ling concealed within ship- border guards patrolling the Lithu- ments of nearly every sort: fruit and anian border on August 10, 2006. A vegetables, fish, building supplies, consignment of 8 million cigarettes, peat moss, timber, scrap cardboard, worth nearly $3 million (about €2 bakery products, paper rolls, and million) in Western European black horse food. Lithuanian police have markets, was found in a truck sup- even found Jin Ling built into fitted posedly carrying fuel. Two months furniture. later, in October 2006, British cus- So pervasive have Jin Ling sei- toms first reported seizing the pre- zures become that Europe-wide, viously unheard-of brand in the customs officials are reporting it as English Midlands. the “most seized” brand. Reports Polish Customs documents ob- examined by ICIJ reveal that during tained by ICIJ show that the coun- 2007, 258 million cigarettes were try’s role as smuggling route to the seized — the equivalent of 25 full West has become pivotal since its container loads, and an 87 percent accession to the E.U. The number jump in seizures over the previous of smuggled cigarettes seized an- year. During 2008, new seizures, nually on Poland’s eastern border routes, and locations have been dis- more than tripled from 243 million covered every week. in 2003 to 750 million in 2007. Far more is believed to get Since August, Jin Ling smugglers through, fueling black markets and have opened a series of new routes funding crime across Europe. Cus- through southern Europe. Some toms agencies typically expect to cigarettes have come from the Lith- uncover 5 percent to 10 percent uanian port of Klaipeda, 120 km (70 of contraband, implying that BTF miles) from Kaliningrad, via Cyprus. might be getting up to 5 billion ciga- Others have been ferried to Turkey, rettes into Europe every year. But and then taken through Greece BTF claims to be making more than heading for central Europe. During three times this amount. September, Romanian customs un- Jin Ling from Kaliningrad started covered two containers of Jin Ling trickling into Lithuania and Poland en route from Greece. The intended during 2005. The first large-scale primary destinations for these ciga- contraband shipment found enter- rettes, say officials, are high tobac-

3Artcl i e 2 of 194 Show Contents 5Pg a e 5 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity co tax Western European countries, sign. When a consignment goes particularly Germany and the UK. through, the smugglers are said to The international scope of the message each other to say “the kids business was made clear by a Sep- have been delivered”. tember 29 seizure of five million Jin Cologne, Munich, and Berlin are Lings aboard two trucks leaving the the German cities most targeted port of Venice, Italy. According to by the Jin Ling smugglers. Berlin Italy’s Guardia di Finanza, the trucks is served by a network of 300 black had Bulgarian license plates, the ar- market sales points, most of which rested drivers were Greeks of Geor- offer Jin Ling, officials say. One sup- gian and Uzbek descent, and the to- ply route used involves concealing bacco came from BTF’s Kaliningrad contraband cigarettes within huge factory. The cigarettes had been regular food consignments distrib- moved by road from Kaliningrad uted to low-price German super- through Russia and Lithuania to the market chains from mainland Eu- Baltic port of Klaipeda, then shipped rope. According to federal statistics, to Larnaca, Cyprus, then shipped one in three residents of the former again by sea to the port of Venice. East Germany smokes smuggled cigarettes. German customs and police in- DELIVERING ‘THE KIDS’ vestigators believe that Jin Ling is German customs officers say they being distributed and sold through are familiar with the traffic of Jin organized crime networks, includ- Ling cigarettes entering and transit- ing Vietnamese and Lithuanian ing Europe on the “Warsaw Alley” gangs, and policed by local enforc- to Berlin and the Ruhr, and then on ers. Vietnamese sellers are ordered to the channel ports of Antwerp and to sell the packs at the fixed price Rotterdam. of €2 a pack ($2.80), or €20 ($28) Their anti-smuggling teams have per carton. extensively used mobile phone The cigarettes are generally sold wiretaps in attempts to block ship- by street vendors operating near ments. Jin Ling consignments, they underground stations. The sellers hear the smugglers say, are called have been found to have created “little goats,” referring to the moun- concealments for their supplies in tain goat on the cigarette pack de- nearby parks, pavements, or road-

3Artcl i e 2 of 194 Show Contents 5Pg a e 6 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity side vegetation. Some sellers in planned to install 6 more machines Germany carry their merchandise during 2007 to bring its capacity in inside bulky clothing. Lviv to nearly 10 billion cigarettes British customs reported finding a year. the new brand with its distinctive The director general and ap- yellow pack, first in Birmingham in parent owner of Baltic Tobacco is 2006 and then in Derbyshire the fol- Vladimir Kazakov, a Russian citi- lowing year. zen. Kazakov told Russia’s business Smuggled cigarettes are sold door magazine Kommersant-Dengi in Oc- to door in public housing develop- tober 2006 that BTF was enjoying ments, or from fast food shops or car a dramatic sales boom. “We cannot trunks, according to tobacco control meet demand, we have no produc- experts. They add that the same tion space,” he explained. channels in Britain and Germany are Kazakov has told the Russian used in parallel to supply narcotics. press that BTF produces two dozen different brands for the mid-range domestic market in Russia, and ex- ‘WE CANNOT MEET DEMAND’ ports 5 percent of its production to In Russia, the Baltic Tobacco Facto- markets including the United Arab ry has been a business success story. Emirates, Canada and the United The company was officially incorpo- States. He boasted of employing 28 rated as Baltiskaya Tabachnaya Fab- regional representatives to sell his rika — BTF — in August 1997. Since brands across the Russian Federa- 2006, BTF has doubled production tion. capacity at its Kaliningrad facility Yet ICIJ’s inquiries in Russia, Eu- from 6.3 billion to 13 billion ciga- rope, and worldwide raise serious rettes a year. A second factory, in the questions about Baltic Tobacco’s Caucasus city of Armavir in southern claim to be producing largely for Russia, was acquired in 2003 and up- Russian consumption. Data report- graded to produce up to 1.8 billion ed by Business Analytica, a Russian cigarettes annually. marketing research service, suggest By April 2007, BTF had installed that BTF’s actual Russian retail sales two new cigarette manufacturing are only 0.1 percent of the Russian machines in a third factory, at Lviv domestic market, or about 400 mil- in Ukraine. The company said that it lion cigarettes a year. Checks of

3Artcl i e 2 of 194 Show Contents 5Pg a e 7 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity cigarette vendors in Russian cities its opposition to cigarette smug- found no evidence of Jin Ling ciga- gling, the company has supplied rettes being sold, even in Kalinin- Baltic Tobacco with high qual- grad. The cigarettes are rarely seen ity Western-style tobacco. In April among the heavy-smoking Russians. 2008, BAT’s Brazilian subsidiary As for BTF’s claim of exporting Souza Cruz shipped 21 tons of to- 5 percent of its annual production, bacco leaf direct to BTF’s Kalinin- that would equal at least 400 mil- grad plant, according to PIERS. The lion cigarettes, or 40 full containers. shipment, according to BAT offi- But checks of PIERS (Port Import cials, was one of four by Souza Cruz Export Reporting Service) — the to BTF since 2003. most comprehensive source on U.S. In 2007, BAT Chairman Jan du waterborne trade data — found no Plessis pledged to “ensure that all records of Baltic Tobacco shipments our operations are directed only at to the United States. A check of un- supporting the legitimate tobacco officially published Russian trade trade. Our companies… cut off sup- data revealed only one small re- plies to any customers knowingly or corded export — to Poland, in 2005. recklessly involved in illicit trade.” ICIJ repeatedly contacted the In an email to ICIJ, BAT spokes- Baltic Tobacco Factory by phone person Catherine Armstrong stated and fax, seeking a response to the that the exports had been routed various issues raised by this inves- through a Brazilian agent and were tigation. BTF officials declined to “an oversight” which “has immedi- comment. ately been put right. . . Our anti- illicit trade team is aware of allegations around the Jin Ling brand TIES TO BIG TOBACCO made by Baltic Tobacco Company. Despite Baltic Tobacco’s marketing Regrettably, our subsidiary Souza tactics, it has ties to major multina- Cruz was not aware until now… we tional tobacco companies, including can confirm consequently that no two of the largest cigarette firms in more tobacco will be supplied.” the world — Japan Tobacco Inter- BAT is not alone in supplying national (JTI) and British American BTF with ingredients suitable for Tobacco (BAT). making better quality cigarettes Although BAT has publicly stated preferred by Western smokers. Rus-

3Artcl i e 2 of 194 Show Contents 5Pg a e 8 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity sian customs data reveal that Baltic (Czar Peter I) brand cigarettes. Tobacco has imported such prod- BTF’s factories at Lviv and Armavir ucts from around the world — to- were formerly owned and operated bacco from Brazil, Panama, Uganda, by RJR. Zambia, and Zimbabwe; filters from But in 2004 BTF was linked to the Baltic republics, paper from another tobacco multinational, UK- Switzerland, Germany, France, and based Gallaher. In that year, BTF Sweden; glue from the Czech Re- was owned by PRT, Ltd., a company public and Baltic republics; flavor- based at the Polish headquarters of ings from the United States; and Britain’s Gallaher Group, located cigarette packs printed in Estonia. in Poddebice near Lodz, according Records show that the company has to the Russian company database also invested heavily in stock and SKRIN. Gallaher took over the Pod- infrastructure, including brand new debice operation – Compania Tyto- machinery from Germany, France, niowa Merkury, a privatized Polish and the Netherlands. state cigarette factory – on 5 March Jin Ling’s origins date back to an 2003. A spokesman for Japan To- obscure Chinese brand exported to bacco International (JTI), now own- Russia. Jin Ling cigarette brand was er of Gallaher, stated in an email originally developed by the Chinese to ICIJ that BTF and PRT “might state-owned Nanjing Tobacco Fac- have been third-party contractors tory. (Jin Ling is an old name for at some point before 2003” with the the city Nanjing.) In the last years Gallaher Group. of the Soviet regime, China bartered According to the Dun and Brad- supplies of Jin Ling cigarettes for street Worldbase database, PRT, Ltd Russian machinery. But the trade continued to be registered at Galla- died out until the brand was re-in- her’s Polish offices in Poddebice as troduced by the first owners of the recently as August 2008. Following BTF factory in 1997. the Gallaher takeover, according to BTF’s director general, Kaza- the world trademark registry WIPO, kov, says he took over in 1999, af- ownership of the Jin Ling trademark ter working with the RJR tobacco was re-registered to BTF in Kalinin- company. He told the Russian press grad on 11 September 2003. that he was RJR’s exclusive Russian PRT Ltd in Poddebice continued to distributor for its popular “Pyotr 1” own the Baltic Tobacco Factory until

3Artcl i e 2 of 194 Show Contents 5Pg a e 9 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity 16 September 2005. Its share value nodar region of southern Russia, was then raised from 960,000 roubles where Kazakov was born. to 120 million roubles ($5 million). All but one of the companies are Ownership was transferred to a single suspected to be run by Kazakov, unidentified Russian citizen. who claims to have spent $45 mil- Kazakov is now registered as the lion on new machinery. The tenth owner of all of BTF’s shares, accord- company, located in the Moldovan ing to Russia’s EGRUL information capital of Chisinau, may be acting as service. a “franchise,” officials say. Both RJR, Kazakov’s former Moldovan state records, how- supplier, and Gallaher, BTF’s for- ever, suggest that the company is mer home, are now part of Japan not linked by direct ownership to Tobacco International (JTI). JTI the Kaliningrad group. The owner acquired RJR’s non-U.S. tobacco of record is Tutun-CTC — which is operations in 1999 and bought Gal- 90 percent owned by the Moldavan laher in 2007. In 2004, BTF joined government. JTI — as well as Philip Morris — in In March 2006, a lawyer acting forming the Moscow-based Tobacco for a Chisinau resident, Vsevolod Industry Development Council. The Ilcenco, registered trademark rights industry group’s stated intent was for the identical brand name and to lobby for more favorable taxes on packaging as the Russian brand Jin filtered cigarettes. Ling in Macedonia, Bosnia, Serbia, Montenegro, Croatia, Greece, and Egypt. His patent lawyer, Leonid THE JIN LING ARCHIPELAGO Cotruta, told an ICIJ reporter that Although unheard of by most Euro- the Moldovan Jin Ling cigarettes pean consumers, the black market were made “only for exporting pur- Jin Ling brand has grown so fast and poses, in countries different to the become so successful that customs Russian manufacturer’s exports.” officials now believe that 10 compa- Brand trademark owner Ilcenco is nies are producing or marketing the also the owner of a duty free ciga- cigarettes. The ICIJ investigation rette trading shop adjoining the EU has independently identified five border with Romania at Sculeni. factories, located in northwestern The Moldovan Jin Ling plant re- Russia, Ukraine, and in the Kras- portedly only began production re-

3Artcl i e 2 of 194 Show Contents 5Pg a e 10 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity cently, but its version of Jin Ling has On October 20, nearly 160 gov- already turned up in EU countries. ernments from around the world When questions were put to Ilcenco will meet in Geneva under a World about the export routes and meth- Health Organization (WHO) treaty ods used, a spokesperson called on tobacco control. The meeting back and said, “I don’t want to tell will agree on new steps to crack you how much we produce or where down on the global illicit tobacco we export.” But if the press were trade. Because of the growing Euro- interested in cigarette smuggling, pean concern, Jin Ling’s burgeoning he added, it was best to write about growth is likely to be a major issue Western tobacco companies. “They at the conference. are also involved in contraband.” Inconvenient questions may be Like Baltic Tobacco’s products, asked of the Russian government, the Moldovan brand of Jin Ling has which has ratified the WHO treaty been found only in illegal western on tobacco control. “The WHO trea- markets, not in the legal markets ty on tobacco control requires sig- claimed by the company. The ad- natories to take action against illicit vertised retail price for Jin Ling in tobacco trade,” points out Professor Moldova is 20 cents per pack. Martin Raw of King’s College, Lon- Another Jin Ling factory uncov- don and author of The Smoking Epi- ered by ICIJ’s reporting team is locat- demic. “The Russian government ed in Donetsk, in the eastern Ukraine. must act.” Operated by Subsidiary Enterprise But Jin Ling’s extraordinary Tobacco Company Khamaday, its growth also raises troubling ques- products have also been found smug- tions about the future of tobacco gled into Poland and the EU. smuggling, which until a few years Production from the Armavir, ago was dominated by big Western Donetsk, Chisinau, and other plants companies looking to gain market is believed to be modest compared share. Baltic Tobacco’s operations to that of Baltic Tobacco’s sprawl- suggest how easy it may be for new ing Kaliningrad facility. But the players to step into channels used industrial levels of black market previously by Big Tobacco, using cigarettes seen flowing out of the the same equipment, production Russian-run factory network have standards and styles, and even the alarmed EU law enforcement. same recently vacated factories. n

3Artcl i e 2 of 194 Show Contents 5Pg a e 11 of 116 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity Going Undercover IsideB n aLTIC Tobacco’s Smuggling Empire By Stefan Candea, Duncan Campbell, Vlad Lavrov, and Roman Shleynov Published Online | October 19, 2008

CIJ’s reporters went to and frontier atmosphere, with luxury Russia to uncover the truth about limousines a frequent sight on the Ithe billions of black market Jin streets. Ling cigarettes turning up across Eu- Russian journalists working in rope. They quickly learned that pack- Kaliningrad know that to openly ask ets of Jin Ling could not be purchased about the cigarette contraband trade even in the shops, markets, or street is a risky business. In 2006, after criti- stalls of the Russian city where they cizing the police — including the pro- are made, Kaliningrad. But Jin Ling tection they give to smugglers — the was available to smugglers, in huge local Novye Kolesa newspaper was quantities, from its manufacturer, the raided and its newspapers confis- Baltic Tobacco Factory. cated. The paper’s co-founder, Igor Kaliningrad can be a dangerous Rudnikov, was then prosecuted for place to ask questions about smug- “beating 22 police officers.” gling. The Russian territory, sand- “In Kaliningrad there were even wiched between Poland and Lithu- contract killings of tobacco business- ania, went into rapid and cataclysmic men,” says Rudnikov, a local par- decline after the break up of the So- liamentary deputy. “But not one of viet Union, but has since profited im- those crimes was disclosed. And it is mensely from its close proximity and hard to imagine that law enforcement excellent transport to the European does not know what is going on.” Union. It has also gained a reputation as a haven for smugglers and money INSIDE BALTIC TOBACCO launderers, and for a police force ac- commodating to smugglers’ interests. To investigate the Baltic Tobacco The city is home to a noisy night life Factory company (BTF) in the high

3Artcl i e 3 of 194 Show Contents 5Pg a e 1 of 46 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity and the home of Baltic Tobacco. The company’s facilities lack addresses or any identifying signs. At one end there is a busy loading pier; at the other, an entrance manned by a security guard In 2006, after criticizing police in Kaliningrad, watching surveil- Russia, local newspaper Novye Kolesa was raided lance monitors. and its newspapers confiscated. Credit: Novye Kolesa. Jin Ling’s m a n u f a c t u r e r s risk environment of Kaliningrad, welcomed their visitors. At the ICIJ’s reporters went undercover company’s offices, a guard ush- in June 2008, with one posing as ered the reporters into an office to a Romanian smuggler setting up meet Dmitry Gyrja, BTF’s logistics a new route to the EU. They car- manager. “We haven’t worked with ried concealed video and recording Romania before, but we’d be really equipment to witness all that they happy to do so,” Gyrja said. saw and heard. (Their video report Gyrja got straight down to busi- is available online.) ness: “We don’t care” what happens BTF’s neighborhood, Pravaya to the cigarettes, the reporters were Naberejnaya, Kaliningrad (“the told. “According to Russian law it Right Bank”), winds along the north doesn’t matter. All the transporta- bank of the Pregol river past former tion arrangements are up to you…” anchorages of Soviet Baltic fleet With payment in advance, he add- frigates and submarines. Number ed, a container could be ready and 10, Pravaya Naberejnaya is a large, waiting in two weeks. “We sell them wooded complex of factories and for 20.5 US cents a pack, duty free.” warehouses adjacent to the town’s The company’s manager boasted distinctive elevating rail bridge, that they could make an entire con-

3Artcl i e 3 of 194 Show Contents 5Pg a e 2 of 46 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity tainer of 10 million cigarettes or waiting in two weeks, the under- “sticks” in 8 hours, and that their cover team was told. It could then production lines operated 24 hours be delivered to the Romanian free a day, 7 days a week. The price of trade zone of Constanta in less than Jin Ling at the factory gate, he was two months. Full payment had to be told, was 20.5 cents or € 0.16 per made in advance. pack. A case would cost $102.50; a Publicly, BTF’s Kazakov has full container, $102,500. boasted that his company mar- The director general of Baltic kets a range of Russian brands Tobacco, Vladimir Kazakov, advised for sale through a nationwide net- the reporters on the quickest and work. But during their tour of the best smuggling routes. Manager 14,000-square- Gyrja also offered the would-be BTF’s manager meter factory, smugglers the services of his com- boasted that secretly record- pany’s fleet of 20 brand new Volvo that their ed on video, the trucks. production reporters saw The offer was genuine. ICIJ’s re- that every ma- porters passed a transit container lines operated chine was man- lorry lined up and loading as they 24 hours a day, ufacturing Jin were shown into and around the 7 days a week. Ling, with its factory. BTF’s logistics manager distinctive yel- told the reporters that they were low packaging and style. No other manufacturing 120 containers ev- brand was being made. ery month — or 1.2 billion ciga- BTF director Kazakov was eager rettes. to discuss deals, offering to deliver Entering the factory, the report- cigarettes from factories in either ers were ushered into huge, bright- Kaliningrad or Lviv in Ukraine. ly lit halls filled with modern and “We work very well through the sophisticated blending, cutting, fill- port in Kaliningrad, where we can ing, rolling, and packing machines. also make the custom clearance,” Jin Ling packs could be seen pour- Kazakov explained. “Transporting ing off the production lines, with the cigarettes from Lviv through one line operating at the rate of 400 Odessa would bring a gain of 3 packs a minute. weeks, but you might waste more A container could be ready and time with custom formalities.”

3Artcl i e 3 of 194 Show Contents 5Pg a e 3 of 46 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity “We guarantee that delivery will customs officers looked on with no be made on time,” he added. “We apparent concern while lines of Pol- can manufacture a container in 8 ish-registered cars and their drivers hours.” crammed their vehicles with hidden BTF, Gyrja added, sold an impres- cigarettes bound for the west. sive two containers each month, or Others, in broad daylight, could about 250 million cigarettes annual- be seen taping dozens of packs ly, at the two main border crossings of Jin Ling to their arms and legs into Poland — the same amount of before crossing the border. Their smuggled Jin Lings seized in all of clothing packed and bulging with the E.U. last year. cigarette packets, their appearance resembled nothing so much as fully equipped and padded American THE ROAD TO EUROPE football players. From Kaliningrad, a team of ICIJ Discarded Jin Ling cases were reporters followed the route of Jin left dumped on the street as Rus- Ling cigarettes and their containers sian customs officers looked on. on their journey to the west. Thirty Each empty case seen at the road- kilometers south of Kaliningrad, side had contained 10,000 ciga- at the Polish border crossing of rettes. Each box would have cost Bagrationovsk, Jin Ling was widely $102.50 at the Kaliningrad factory, available. Just outside the shabby but would be worth at least 10 times town, parts of which have been left more if smuggled successfully to unrepaired since 1945, smuggling Western black markets. Each aban- is big business. As at other border doned box was prominently marked crossings between Russia and the in red and blue with the crest and EU nations of Poland, Latvia, and name, in Cyrillic, of the Baltic To- Lithuania, cigarettes are not only bacco Factory. n smuggled through in full container loads; they are also broken down into small quantities by armies of personal smugglers and their managers. Peddlers’ booths lined the road- side. Reporters observed as Russian

3Artcl i e 3 of 194 Show Contents 5Pg a e 4 of 46 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity Ukraine’s ‘Lost’ Cigarettes Flood Europe Bg i ToBACCO’s Overproduction Fuels $2 Billion Black Market By Vlad Lavrov Published Online | June 28, 2009

he hang glider pilot in- bus and train, bound for other Eu- sisted it was a routine flight, ropean countries where high taxes Tand that strong winds had make packs cost as much as $5 (Ger- blown him over the border from Hun- many) or $10 (United Kingdom). gary into Ukraine. But the man ar- The backbone of this underground rested by Ukrainian authorities last commerce — the acquisition of the July, with his flight suit and night- cigarettes themselves — is by far vision gear, looked suspiciously like the easiest part of the entire opera- other hang-gliding smugglers along tion. The world’s four leading multi- the border — smugglers who take off national tobacco companies, Philip from Ukraine, fly into Hungary, and Morris International, Japan Tobacco each drop as much as 100 cartons of International (JTI), Imperial Tobac- contraband cigarettes. co, and British American Tobacco Ukraine is home to some of the (BAT), have produced billions of ex- world’s cheapest cigarettes — at cess cigarettes in Ukraine, fueling a $1.05 per pack — making the coun- teeming black market that reaches try a bonanza for smugglers, whether across the European Union. Today, by glider or more mundane pathways Ukraine is rivaled only by Russia as on the ground. Cars and trucks filled the top source of non-counterfeit with Ukrainian-made Marlboros and brand cigarettes smuggled to Eu- Viceroys get waved through border rope, EU officials say. checkpoints by customs guards who The booming trade in tobacco seem more than eager to accommo- smuggling has major consequences, date, for a price. Loads also move by say industry experts. The grow-

3Artcl i e 4 of 194 Show Contents 5Pg a e 1 of 66 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity ing traffic pushes huge supplies of cheap, untaxed, and unregulated Smuggled Smokes: cigarettes into the rest of Europe, Ukraine’s 30 Billion undercutting otherwise successful attempts to curtail smoking. Worse, “Missing” Cigarettes officials say, the trade is boosting Led by Philip Morris International, Big organized crime gangs, who find the Tobacco in 2008 produced 130 billion soft penalties and big profits hard to cigarettes in Ukraine. Officials resist. estimate nearly a quarter of those The numbers tell the story. Each were smuggles abroad, fueling black year, Ukraine’s cigarette consump- markets across Europe. tion and legal exports top 100 billion sticks, according to Ukraine’s Min- istry of Health. Yet in 2008, tobacco 30 Billion Smuggled companies manufactured and imported nearly 130 billion cigarettes 10 Billion — 30 percent in excess of what the Legally Exported local market can consume. These “extra” cigarettes disappear in the market, feeding an illicit trade that is worth, conservatively, $2.1 billion 90 Billion Consumed annually. Ukrainian cigarette production, meanwhile, has steadily risen Sources: State Statistics since 2003, according to an analysis Committee of Ukraine; Customs by ICIJ of data compiled by SOVAT, Service of Ukraine; SOVAT, a tobacco and alcohol industry a tobacco and alcohol industry as- association in Ukraine; World sociation, and Ukraine government Health Organization statistics. In fact, cigarette production in Ukraine increased one-third Graphic by Stephen Roundtree between 2003 and 2008 — from 96.8 to 129.8 billion — with JTI and Philip it has become a parallel industry, Morris leading that trend. experts say, with all sides benefit- What happens to those 30 billion ing from it, from manufacturers to “lost cigarettes”? The huge surplus organized crime gangs who control has reached such proportions that the black market. In addition, hun-

3Artcl i e 4 of 194 Show Contents 5Pg a e 2 of 66 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity dreds of thousands of Ukrainians, Enforcement is lax at best; most Romanians, Hungarians, and Poles big seizures of smuggled Ukrainian along the border rely on the traffick- smokes take place not in Ukraine but ing of cigarettes for their livelihood, in neighboring Romania, Poland, and buying the cheap smokes in Ukraine Hungary. and unloading them tax-free in Eu- ropean countries where prices are BLAME GAME far higher. Distribution of smuggled “dis- Attracted by high smoking rates and count cigarettes” with Ukrainian ex- the potential for rapid returns on cise stamps is also flourishing on the investments, multinational tobacco Internet through numerous Moldo- companies rushed to acquire the va-based online stores, which deliver state-run cigarette factories after them to customers worldwide. the Soviet regime collapsed in 1991. “Tobacco companies are benefit- Today, the big four tobacco compa- ing from selling to smugglers,” says nies — Philip Morris, BAT, JTI, and Kostyantyn Krasovsky, head of the Imperial — control 99 percent of the tobacco control unit of the Institute Ukrainian cigarette market. of Strategic Research at Ukraine’s “The former Soviet Union, partic- Ministry of Health. “They sell it to ularly the most populous countries them at the same prices they sell to such as Russia and Ukraine, repre- legal wholesalers.” Krasovsky adds sented a massive opportunity for that in dealing with smugglers, to- the tobacco companies. Men were bacco companies can potentially already smoking in large numbers gain extra profits when a batch is but the companies knew they could confiscated by customs and de- push many more women to smoke, stroyed. “It’s even better for them; and they did,” said Dr. Anna Gilmore, another smuggler will come and buy a senior public health researcher at the same quantity.” the University of Bath, in the UK, Even after recent hikes, cigarette who has written extensively about taxes in Ukraine remain among the the tobacco industry in the former lowest in Europe. The low price of Soviet Union. “As a result, Eastern Ukrainian cigarettes means high Europe is now one of only two re- profits for smugglers, who have gions in the world where both num- pushed the product all over Europe. bers of cigarettes sold and profits are

3Artcl i e 4 of 194 Show Contents 5Pg a e 3 of 66 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity increasing (the other region is Asia), act figures of this brand’s output. In and this makes it extremely impor- 2008, JTI manufactured roughly 37 tant to the industry.” billion cigarettes in Ukraine, roughly The Tobacco Atlas, published by 30 percent of the nation’s total pro- the American Cancer Society and duction. According to Redko, when the World Lung Foundation, identi- JTI bought British manufacturer Gal- fies Ukraine as one of the countries laher in 2007, it also inherited what with the highest annual rates of ciga- he called Gallaher’s “outflow” issue rette consumption per person in the — smuggled cigarettes — and the world: 2,526 cigarettes. company has since tried to correct it. The tobacco companies, for the BAT also has had its share of trou- most part, acknowledge that they are bles in Ukraine despite the fact that churning out more cigarettes than the company’s output in Ukraine has the local market can absorb, but they declined 30 percent since 2003. In a say they sell only to licensed distribu- 2007 corporate report the company tors and periodically reduce the out- acknowledged that it had to cease put of certain brands that are popular production of its Pall Mall brand in among smugglers. Beyond, that, they the country after an audit showed claim, it’s up to law enforcement to that “local production was not pro- prevent smuggling. “Objectively, we portionate to local demand,” and cig- know that our brands produced in arettes were widely being smuggled Ukraine are found in Europe,” said to Germany. BAT stated in the report Dmytro Redko, JTI’s director of cor- that the company’s actions helped porate affairs in Ukraine. “We do our reduce the smuggling of its products best to prevent such shipments, al- from Ukraine by 3 billion cigarettes though we can’t halt them completely. in 2005 and 2006. “It is our belief That is the function of the [Ukraine] that if all manufacturers took this ap- government.” proach, outflows from Ukraine could JTI, which is owned in part by the be significantly reduced,” BAT’s chief Japanese government, manufactures of anti-illicit trade, Pat Heneghan, some of the brands that smugglers told ICIJ in an e-mail. cherish the most, including Ronson. Philip Morris, maker of Marlboro, Redko says his company is constant- is the top producer of cigarettes in ly decreasing production of Ronson, the Ukraine, with 44 billion sticks though he would not disclose the ex- manufactured in 2008 — an increase

3Artcl i e 4 of 194 Show Contents 5Pg a e 4 of 66 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity in production of more than 85 per- networks to smuggle cigarettes and cent since 2003. Marlboro, EU of- gain market share around the world. ficials say, remains the number one Since 2004, Philip Morris and JTI brand seized in Europe. Ukrainian have settled lawsuits brought by the law enforcement officials say that EU and publicly committed to fight Philip Morris’ brand L&M is routine- smuggling. The agreements require ly seized at the border. Philip Morris both companies to make substantial International’s director of brand in- payments to the member states ev- tegrity, Andrew Robinson, told ICIJ ery time their brands are seized. that the country does indeed have Experts say, however, that only “an ongoing problem of diversion of a tiny portion of all contraband genuine products from Ukraine into cigarettes are caught by Ukrainian the EU,” but, he stressed, the com- customs. In 2008, customs officials pany’s production is commensurate seized about 66 million cigarettes — with demand. Robinson added that less than one percent of what they Philip Morris has implemented a so- believe was smuggled out of the phisticated system of product track- country. ing and tracing in Ukraine, and that Then there’s the problem of cor- it actively cooperates with law en- ruption. Several of the more than 120 forcement to prevent smuggling. criminal smuggling cases prosecuted Imperial Tobacco officials de- in 2008 in the picturesque region of clined to comment for this story. In Chernivtsi, on the border with Ro- 2008, Imperial manufactured more mania, involve customs agents who than 30 billion cigarettes in Ukraine, aided the smugglers, Ukrainian po- according to industry and govern- lice say. In just the first two months ment statistics, the third largest pro- of this year, three cases have been duction after that of Philip Morris prosecuted in Chernivtsi in which and JTI. customs officials “overlooked” the smuggling of 10.3 million cigarettes — more than half of them JTI’s Ron- EVERYONE’S WINDFALL sons. The big tobacco multinationals in Tobacco companies say they mon- Ukraine are not strangers to the itor their wholesalers for suspicious- smuggling business — in the 1990s ly large sales of cigarettes. Smug- the firms colluded with criminal glers, in turn, have started to split

3Artcl i e 4 of 194 Show Contents 5Pg a e 5 of 66 Tobacco Underground: Part One | Europe ©2009 Center for Public Integrity large purchases into many smaller ask for their money back. Also plen- purchases to avoid detection. “We tiful on Ukrainian Internet sites are don’t know really who is buying from classified ads offering Ukrainian cig- the wholesalers, as these are small arettes delivered to the EU “in large batches” said JTI’s Redko. quantities,” “on constant basis” and Krasovsky, of the Ministry of “without any paperwork.” Health, says tobacco companies are One such ad, posted on January 9, doing little to stop smuggling. By 2009, offered delivery of cigarettes checking the seized packs’ produc- from Ukraine to Europe. In response tion dates, he said, manufacturers to an online inquiry, a person who could monitor where cigarettes have introduced himself as Oleh Dmytruk been bought and cut off wholesalers responded by saying that delivery of who deal regularly with smugglers. red Marlboro can be made to Ger- Instead, he adds, “tobacco companies many at 18 Euros (about US$25) supply cigarettes to a wholesaler that per carton. The minimum purchase: has a huge warehouse in the border 1,000 cartons. with Poland — it’s obvious where In Krasovsky’s view, the only way those cigarettes are going to go.” to halt smuggling is to make the trade Internet merchants are also mak- unprofitable for manufacturers. He ing a windfall from Ukraine-made and other tobacco control advocates cigarettes. A Web search for “cheap propose that, much like in the Philip Ukrainian cigarettes” yields about Morris-EU agreement, tobacco com- two dozen online stores, most of panies in Ukraine be forced to buy them located in neighboring Moldo- back their seized cigarettes at mar- va. The sites offer all the well-known ket prices. brands, from Marlboro to Winston, But the economics of smuggling with Ukrainian tax stamps and health may be too sweet for at least some warnings. The price is $22 for a car- tobacco companies to stop. Asked ton (10 packs) of Marlboro — about whether the tobacco industry loses three times cheaper than prices in money to the illicit trade in Ukraine, the EU. The sellers claim that they JTI’s Redko responded candidly: will skip customs inspections at the “What do you mean by loss? From destination country. If customs does the point of view of a company op- try to charge a duty tax, customers erating on the market, production of are advised to reject the package and extra goods means extra profits.” n

3Artcl i e 4 of 194 Show Contents 5Pg a e 6 of 66 Tobacco Underground: Part One | China ©2009 Center for Public Integrity China’s Marlboro Country AssiU Ma ve nderground Industry Makes China the World Leader in Counterfeit Cigarettes By Te-Ping Chen Published Online | June 28, 2009

nit f rs approach, ern Fujian county about twice the Yunxiao seems like any area of New York City. Over the past Oother Chinese backwater ten years, production of counter- caught in uneasy industrial transi- feit cigarettes in China has soared, tion. Faded advertisements line the jumping eightfold since 1997 and streets downtown, where motorcy- making China the world leader in clists wearing bamboo-frond hats fake smokes. Chinese counterfeit determinedly vie for passengers in cigarette factories now churn out a riot of honking. A cheerful red an unprecedented 400 billion ciga- banner in the city center exhorts rettes a year, enough to supply ev- citizens to develop the local econ- ery U.S. smoker with 460 packs a omy — and yet the message seems year. Yunxiao — once famed for its ironic. After all, since the 1990s, bright yellow loquat fruit — is the Yunxiao has already sprouted its trade’s heartland: the source of half own league of millionaires, famous such production, officials say. throughout China. Today, China’s fake cigarettes But you won’t find their activity fuel a multi-billion dollar black mar- downtown. ket and are even more hazardous Ringed by thickly forested moun- for smokers, yet the industry is lit- tains, illicit cigarette factories dot tle-known. From New York delis to the countryside: carved deeply into London storefronts, China’s brand caves, high into the hills, and even rip-offs are now sold in cities around buried meters beneath the earth. the world. While a pack of fake Marl- By one tally, some 200 operations boros costs $0.20 to make in China, are hidden in Yunxiao, a southwest- in the United States, it can fetch up

Officials estimate billions of fake Chinese smokes are being smuggled from ports like Xiamen to countries around the world. Credit: Te-Ping Chen

to twenty times that amount, even percent of the U.S. counterfeit mar- when sold at cut rates. Spurred by ket is supplied by China, and up to global crime rings, the counterfeit 80 percent of that in the European trade has exploded, propping up Union. Meanwhile, Chinese govern- addiction and robbing governments ment efforts to stop the trade are of billions in annual tax revenue. met by street riots, machete-armed Officials can only guess at the size manufacturers and retaliation kill- of the industry here in the United ings. States, but to give a sense of scale, “Most factories are under- from 1999-2005, one ring smuggled ground,” confides a Yunxiao ciga- a billion fake cigarettes into Los rette broker in hushed tones. Angeles and New Jersey. Fully 99 “They’re under buildings, unimagin-

3Artcl i e 5 of 194 Show Contents 5Pg a e 2 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity ably well-hidden, with secret doors Valencia and Hamburg. The indus- from the basements.” Even the vil- try has also attracted a sprawling lage temple — topped with a lilt- network of middlemen and smug- ing red roof and twisting, frescoed glers, notably from the Middle East spires — conceals a factory below, and Eastern Europe. she says. “In the last few years, pretty much every market has been targeted,” says Andrew Robinson, who di- SIXTY VERSIONS OF MARLBORO rects the brand integrity division for Though a nearly invisible industry, Philip Morris International (PMI). In cigarette counterfeiting is an im- 2001, Chinese manufacturers were mensely lucrative one, with profits producing eight different varieties rivaling those of the narcotics trade, of counterfeit Marlboros. As of last officials say. While one 40-foot con- year, though, PMI reports, Chinese tainer of cigarettes (containing 10 counterfeiters were manufacturing million sticks) can be produced in separate versions of Marlboro tai- China for just $100,000, the street lored for some 60 countries — down value of such a container smuggled to the specific detail of tax stamps into the United States is up to $2 and regional health warnings. million. And though a drug trafficker “Ten years ago, [there were] al- might land a life sentence if caught, most no counterfeit cigarettes,” says a cigarette counterfeiter receives a Austin Rowan, who heads cigarette comparative slap on the wrist — a fraud investigations for the EU’s handful of years in jail, or possibly a Anti-Fraud Office, known as OLAF. fine. Last September, though, the tide of Interviews with law enforcement fake smokes flooding the European officials, tobacco industry inves- Union — most of them Marlboros tigators, and the smugglers them- from China — prompted OLAF to selves reveal the Chinese business post its first-ever officer to Beijing. is booming, with no shortage of In the United Kingdom alone, the groups vying to enter the trade. The illicit trade costs the government Chinese diaspora plays a major role nearly $5 billion a year. “People are in distribution, with groups particu- hungry for these products,” says larly active around New York City, Rowan. Vancouver, Rotterdam, Le Havre, Inhaling the knock-off cigarettes,

3Artcl i e 5 of 194 Show Contents 5Pg a e 3 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity however, may do even more damage Yunxiao has become a watchword than their legitimate counterparts. among China’s counterfeiters, with Lab tests show that Chinese coun- manufacturers from other regions terfeits emit higher levels of dan- even claiming their cigarettes origi- gerous chemicals than brand-name nate in the area — a kind of double- cigarettes: 80 percent more nicotine layer decoy. and 130 percent more carbon mon- Last December, China’s Ministry oxide, and contain impurities that of Public Security announced the include insect eggs and human fe- bust of one of the largest interna- ces. And by targeting smokers with tional schemes in years, a network cheap cigarettes, health authorities of 27 suspects that reportedly fear the counterfeit influx diminish- smuggled at least 600 million fake es incentives to quit. (Centers for cigarettes around the globe. While Disease Control studies show that the cigarettes — mostly counterfeit every 10 percent increase in ciga- Marlboros and 555s — were shipped rette prices causes a 4 percent drop as far as South Africa, Greece, In- in consumption.) donesia and the United Kingdom, Back in the 1990s, counter- they’d all been manufactured in feit packs from China often came southwest Fujian, deep in rugged riddled with easy giveaways: mis- mountains. spelled health warnings, blurred Fujian’s cigarettes also lay be- lettering. These days, OLAF reports hind a massive U.S. smuggling net- that sophisticated industry foren- work the FBI busted in 2005. Two sics are needed to identify China’s sting operations code-named “Oper- counterfeits. In the United King- ation Royal Charm” and “Operation dom, where authorities in some ar- Smoking Dragon” netted a group of eas report that up to one-third of 62 ethnic Chinese who smuggled all cigarettes sold are fake, mostly one billion cigarettes into the Los from China, customs officers have Angeles-Long Beach and Newark deployed a trained dog to try and ports, using false descriptions such sniff out counterfeits on the streets. as “wicker furniture” and toys. The When it comes to the source counterfeits, largely Marlboros and of top-quality fakes like these, all Newports, were in turn sold on the roads lead back to Yunxiao. The ar- streets of Los Angeles, Chicago, and ea’s cigarettes are so renowned that New York City.

China’s Counterfeit Smokes Shanghai China today is the world’s epicenter of counterfeit cigarette production, churning out an unprecedented 400 billion fake smokes each year. The coastal provinces of Fujian and Guangdong account for 80 percent of production, while Yunnan supplies much of the tobacco. From Yunxiao, Fujian—where half of the cigarettes are made—the knock-offs are shipped East to cities like Shanghai, Hong Kong and Guangzhou, and China then smuggled worldwide. Sea

CHINA Fujian Yunxiao Province Yunnan Guangdong Xiamen Province TAIWAN Guangzhou

VIETNAM Hong Kong

LAOS South Pacific China Ocean Sea

Tocacco supply Counterfeit cigarettes THE PHILIPPINES shipped THAILAND

0 200 Kilometers Area of CAMBODIA Detail Source: International Consortium of Investigative Journalists www.icij.org

Graphic by www.stephenrountree.com

3Artcl i e 5 of 194 Show Contents 5Pg a e 5 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity “Any brand or quality, Yunxiao strategy to deal with it by now,” says can help you make it,” says a for- one Beijing smoker, who personally mer cigarette smuggler from Fujian. refuses to buy at locations where he “You just need to name your price.” doesn’t know the owner. The problem is so bad that on trains, conduc- tors roam the aisles, industriously A FLOOD OF FAKES hawking 75 cent keychain lights It’s hard to overstate the ubiquity that purportedly reveal fake packs. of tobacco in China, a country home After all, while the West is the to one of the world’s most elaborate most lucrative counterfeit market, and entrenched smoking cultures. for smugglers, it’s also the riskiest. Here, the introductory exchange of Inside China, local ties and protec- cigarettes is as ritualized as a hand- tionism afford some degree of con- shake, while expensive packs moon- trol: a friendly $10,000 tribute, one light as everything from wedding customs official confides, has been gifts to bribes — even offerings on the going rate to bribe a container out ancestors’ tombs. of the Xiamen ports in recent years. As an official from the tobacco (And even without payment, inspec- company Rothmans once put it, tion rates at China’s ports are a low “Thinking about Chinese smok- one to two percent) Beyond China’s ing statistics is like trying to think borders, though, containers are more about the limits of space.” Every vulnerable to detection by outside year, China’s smokers consume law enforcement, many of them new- one-third of the world’s tobacco: an ly vigilant against the fake trade. overwhelming 2.2 trillion cigarettes. “We’re seeing seizures all the Cigarette-related mortality levels, time,” says PMI’s Robinson. In May, too, are equally staggering, with UK authorities seized over 20 mil- fully one-third of all Chinese men lion counterfeit Regals (valued at under age 30 predicted to die from $8.6 million) imported from China the pandemic. into Southampton. Likewise that Like anything else related to to- month, Spanish authorities grabbed bacco in China, the number of coun- 20 million fake Marlboros — falsely terfeits flooding the domestic mar- described as mattresses — import- ket is similarly off the charts. “Each ed from the Chinese ports of Chiwan of us has come up with our own and Shekou. Also in May, French

3Artcl i e 5 of 194 Show Contents 5Pg a e 6 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity customs intercepted more than 15 million made- in-China fake Marlboros outside Paris, some bearing Vietnamese as well as Arabic and French health warnings. Nevertheless, says OLAF’s Rowan, such seizures are just “the tip of the iceberg.” Smugglers frequently ship cigarettes through an array of destinations such as Dubai In China, cigarette smoking rates are off the and Singapore to mask a charts, and so are sales of counterfeits. container’s origin, with Credit: Te-Ping Chen some spending up to three months at sea before delivery. And $100 million in annual sales. even if a container is seized, given With so much profit at stake, this exorbitant per-container profits, underground industry has culti- the loss is a slim deterrent. “With vated a notably violent set of play- nine containers seized in ten,” Row- ers. Past factory raids have yielded an says, “[smugglers] still would not semi-automatic rifles and met with be losing money.” armed resistance, and every year, For counterfeiters, the rewards several state and private investiga- are especially prodigious. Accord- tors are killed in their efforts to pen- ing to manufacturers, state-of-the- etrate the trade. The average raid is art cigarette machines (available carried out by hundreds of Chinese online from sites like Alibaba.com) police. During one 2003 operation, can fetch a pricey $1.5 to $3 million. says a security consultant at ZIC, “But everyone knows that the in- fully 5,000 officers were deployed. vestment can be recouped in just a (ZIC no longer takes on cigarette few months of manufacturing,” says cases, according to the consultant, a Yunxiao broker. Some factories because the risks have become too boast up to 500 workers and over great.)

3Artcl i e 5 of 194 Show Contents 5Pg a e 7 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity In the 1990s, Chinese counterfeit- brazen as well. Many openly court ers relied heavily on Macao, Taiwan, clients through online storefronts, and Hong Kong for technical exper- touting quality guarantees and their tise, as well as high-quality packag- equipment’s international caliber. ing. These days, though, China’s One Yunxiao operation, established counterfeiters source the majority in 1993, assures customers of its of their supplies from the mainland: experience exporting to Asia and tobacco from Yunnan province in the Africa, and says it maintains its west, packaging from Dongguan and own tobacco leaf fields in Laos. The Shantou in nearby Guangdong prov- company — which churns out some ince, and cast-off machines bought 80 million cigarettes a week—prom- online from underground manufac- ises a six-day manufacturing turn- turers or recently shuttered state around, door-to-door delivery for facilities. (Over the past decade, certain overseas clients, and impec- China’s legal cigarette industry has cable customer service. been consolidated, with the number The tone is reassuring and gen- of factories shrinking from 185 to tly instructive. For tentative buy- 31 since 2001.) Counterfeiters have ers, the owners guarantee that for not only acquired the technology to the U.S. in particular, it’s a “profit mimic holograms used to distinguish business.” Reads their website: “We real packs, but also the rounded-cor- strive to build and maintain a total ner packaging the tobacco industry honesty management culture, and has introduced in recent years. will appreciate the chance to do And as manufacturing technology business with you.” has improved, so, too, has the speed with which counterfeiters respond JAMES BOND AND PIG PENS to shifting markets. This December, when Irish authorities seized a ship- In China, as elsewhere, a success- ment of 20 million counterfeit ciga- ful business relies on more than just rettes, they found the made-in-China technology — it requires serious packs bore exact replicas of Ireland’s support from investors and brokers. latest tax stamps, which had been in Men, for example, like Tony Tung. circulation only a few months. Originally a fishmonger from Fu- With the advent of the Internet, jian, for the past 15 years, Tung — counterfeiters have become more square-jawed, middle-aged, with a

3Artcl i e 5 of 194 Show Contents 5Pg a e 8 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity thick coif of black hair — has ranked familiar with Asia. Recently, his among China’s most notorious ciga- syndicate has started using fishing rette dealers. Tung, though, didn’t boats to smuggle its product around start out smuggling fakes. In the ear- Asia, the better to dodge inquisitive ly 1990s, he found gold in the gen- customs officials. uine product: Marlboros and 555s Tung and his fellow counterfeit- smuggled into China from abroad. ers employ an impressive bag of For years, the Chinese govern- tricks to avoid scrutiny. One manu- ment has worked strenuously to facturer (arrested in 2001) con- keep foreign cigarette companies structed a factory that masqueraded at bay, capping imports and levy- as a People’s Liberation Army coming tariffs as high as 430 percent. pound, complete with 20 laborers That, though, didn’t deter compa- — dressed in cast-off military uni- nies like British American Tobacco forms — who would conduct faux- from smuggling their products into army drills and sing the national China — or Chinese enterprisers anthem in the yard every morning. like Tung, who made millions smug- Other machines have been lodged gling legally produced cigarettes in on ships, inside concrete bunkers, the Philippines into China. and even under a lake. But when China cracked down on “Finding these guys is like a the trade in the 1990s, Tung turned James Bond movie,” says Keith his sights to the next industry bo- Tsang of the China Association of nanza: counterfeiting. Tung built up Industry Security Professionals. factories in Fujian, as well as in the “You’d never believe it was for real.” Philippines (closed by authorities in In Yunxiao, factories are fre- 2005) and the free-trade zone of Ra- quently hidden in dim, bricked-in jin, North Korea. In recent years, his facilities underground, accessible enterprise has reportedly shipped only via trapdoor and ladder. The up to 50 containers a month — or turf masks the tobacco scent, while 500 million cigarettes — to markets nearby sentries are used to monitor throughout the United States, Eu- passersby. Workers staff produc- rope and Asia. Tung continues to tion lines in teams of six or seven, elude authorities, shuttling between feeding tobacco into large, heavy Singapore and nearby countries, ac- machines anchored in concrete cording to a tobacco industry source foundations. Above ground, manu-

3Artcl i e 5 of 194 Show Contents 5Pg a e 9 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity facturers use other ploys to hide Shenzhen explains, “Nobody can the tell-tale aroma: double-paned tell anymore whether they’re real.” glass and cotton quilts tacked to the walls, with pig pens sited nearby. THE MOUNTAINS ARE HIGH In Yunxiao, investigators say, the easiest way to find a factory is often Since its accession to the World by searching for signs of industrial Trade Organization, China’s lack- power sources. luster efforts to protect intellec- Like many industries, China’s tual property rights have attracted counterfeit operations are distrib- sharp criticism. But with regard to uted: tobacco cutting and drying at tobacco, Beijing has waged a more one site, cigarette rolling at anoth- aggressive war. All legal manufac- er location, and packing still else- ture and distribution of cigarettes is where. These days, the packing — state-owned, and in a nation of 400 usually managed outside port cities, million smokers, that’s big business. just prior to shipment — is the only (Local governments are zealous process that hasn’t yet been mecha- about defending it, too: until this nized. In major distribution centers May, officials in Hubei were required like the city of Guangzhou, 300 to smoke a collective 230,000 packs miles west of Yunxiao, laborers still of regional brands a year.) With cig- fill and seal the branded packs by arette sales accounting for nearly 8 hand. In one city corridor crammed percent of China’s budget in 2007, with wholesalers, teenage girls from the state has a strong motive to Fujian stroll arm-in-arm in the quiet keep its supply counterfeit-free. pre-dawn darkness, awaiting their Certainly the relevant authority, next shift. the State Tobacco Monopoly Admin- Twenty-five years ago when istration, has spared no resources multinational tobacco companies’ in trying. By 1995, long before mul- smuggling activities took off, Chi- tinational tobacco companies had nese smokers flocked to foreign seriously mobilized on the issue, the brands. Now, cigarette vendors STMA had already dedicated $12 mil- say fake Marlboro and 555s are so lion to combating counterfeiters. The common that many Chinese simply agency today fields 50,000 agents to choose to avoid them altogether. As fight the fakes, according to industry one former cigarette smuggler from sources. Meanwhile, this year, ac-

3Artcl i e 5 of 194 Show Contents 5Pg a e 10 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity cording to a police officer in the Yunx- own motto: “Any official can abso- iao region, the STMA has dispatched lutely be bought within half a month.” some 150 officers directly to the re- In some cases, a gift of just $1,500 can gion for up to year-long postings. buy a counterfeiter a license to oper- Last year, officials say, the STMA ate and some official breathing room. raided 3,312 production sites Last year, 28 officials werereportedly throughout China, apprehending detained in connection with cigarette 7,128 people in the process and counterfeiting on charges such as seizing 8.3 billion counterfeit ciga- dereliction of duty, cover-ups, or ac- rettes. The STMA also regularly tually participating in the trade. holds public “destruction ceremo- From another perspective, the nies” to demolish seized cigarette counterfeit industry is also a boon equipment, hoisting the machines for local employment, which some up into the air by crane before dash- officials are loath to suppress. “The ing them onto concrete below. question for authorities now, with “China devotes a huge amount the economic slowdown, is: Do you to enforcement,” agrees Martin really want to shut these places Dimitrov, a professor at Dartmouth down?” says Tim Trainer, who heads College who has studied the issue. the Global Intellectual Property “The puzzle is that there seems to Strategy Center in Washington, D.C. be little effect.” For some, it seems, the answer It’s not that manufacturers don’t is no. Last year, though China’s Ad- feel the pressure. One manufactur- ministration of Industry and Com- er reports that local counterfeiters merce completed 13 percent more are losing up to $300,000 a day in intellectual property raids than seized materials, and phone calls to in 2007, the number of such cases a handful of different counterfeit- transferred for criminal prosecution ers suggest a number are currently dropped 40 percent. This January, laying low, hesitant to expose them- the Guangdong prosecutor’s office selves to new buyers. instructed prosecutors to “cautious- But when it comes to Yunxiao’s ly choose whether cases should be factories, an old Chinese idiom seems brought,” and with less serious particularly fitting: The mountains criminal cases, “postpone enforce- are high, and the emperor is far away. ment where appropriate.” Likewise Yunxiao villagers, too, quote their in December, the deputy minister of

3Artcl i e 5 of 194 Show Contents 5Pg a e 11 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity Shandong’s public security bureau “Even though there are crackdowns, (recently arrested for corruption) I don’t see any long-term plan to pressed police to avoid “aggravat- eradicate the industry.” While the ing” businesses’ production prob- STMA pays any police division up to lems, for fear of “increas[ing] the 15 percent of the retail price of any likelihood of mass protests.” goods seized, those incentives, he ex- No matter Beijing’s intentions, na- plains, are useless in nabbing those tional priorities can only filter down involved. “When cars [with cigarettes] so far. One police officer based just are stopped, the drivers run away, but outside Yunxiao, who asks to remain the police don’t care, because they’ll anonymous, reports that his supe- get a reward anyway,” he says. riors deliberately downplay fighting In the last five years, one multi- those in the trade, and that an arrest national tobacco company has al- is an anomaly. Most workers caught tered its tactics on the mainland, will “just pay some fines,” and even choosing to focus its efforts on if arrested, their bosses will bribe or seizing goods as they leave China, bail them out. As for catching produc- rather than on identifying production bosses, he says, it’s “impossible.” tion sites. “In an ideal world, we’d They’re too deeply insulated, he says, be able to go after them, but that and too adept at hiding: some hold as became too hard,” says a tobacco many as 100 fake identity cards from industry official. There are simply China’s 22 different provinces. too many—and besides, as he asks, Even if caught, the maximum “At the end of the day, are we really sentence a cigarette counterfeiter going to convince the provincial au- can expect is just seven years. Three thorities in Fujian to crack down?” years is the minimum and more common sentence, says CAISP’s THE SHANGHAI PROFESSOR Tsang. To put someone in jail for even that long, authorities have to Few in Yunxiao will talk openly about seize over $36,800 in contracts or the village’s main industry. One goods, a threshold counterfeiters knowledgeable resident, a 30-year- try to duck by scattering storage old woman and sometimes cigarette and production efforts. broker, tried to explain why the trade “It’s impossible to root out this flourishes so well in her community. business,” says the police officer. The counterfeiting industry, she told

3Artcl i e 5 of 194 Show Contents 5Pg a e 12 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity visitors, is more than just a business, tour Yunxiao for a month, helping it’s a brotherhood. Only those whose fine-tune local recipes. entire family tree can be traced to the As they battle with Beijing, Yunx- area are permitted to work in produc- iao’s manufacturers show no signs of tion. Regional markets are divided by backing down. Some have stepped family, and once established, firmly up investment in new factories out- respected — spurring others, in turn, side the area, including the cities to develop their own new markets. of Pinghe and Zhangpu. Others are Unity is fierce, she says: that’s why shifting production outside of China Yunxiao is so well-protected. altogether, as far away as Vietnam Surveillance is heavy in Yunxiao’s and Burma. Meanwhile, overseas law narrow side streets and in its hotels, enforcement facing the counterfeit and outsiders are frequently tailed. influx is baffled by the trade: tracing Though authorities offer rewards of a seized container to its producers, up to several thousand dollars for industry officials say. is “almost im- information, few residents dare to possible,” given that the majority of take them, she says. “Even if you company names used on accompa- get the money, you won’t have any nying records are also fake. life left to enjoy it in afterwards.” Yunxiao might someday change, But when it comes to production, but such a transition would take many she adds, Yunxiao people are noth- years, says the broker. One manufac- ing less than business-minded “pro- turer she knows invested $2.5 million fessionals.” She tells the story of one to start another legitimate business Shanghai chemistry professor, who elsewhere, but recently quit and re- manufacturers collectively enlisted turned — disappointed, she reports, five years ago to help them better because “the profits could never mimic the popular Chinese cigarette match counterfeit.” brand Hongtashan. Counterfeiters Still, though, she hopes the in- paid him $15,000, and have reward- dustry will make a shift: “We locals ed him with royalties ever since. hope we can work together to build Similarly, in years past, she says, up a real factory someday.” n local counterfeiters have invited retired workers from the state-owned Patricia Chan in Hong Kong and Shanghai Cigarette Factory — home Alain Lallemand in Brussels con- to some of China’s top brands — to tributed to this report.

3Artcl i e 5 of 194 Show Contents 5Pg a e 13 of 136 Tobacco Underground: Part One | China ©2009 Center for Public Integrity Smoking Dragon, Royal Charm AlefF Ta o our FBI Agents, 62 Chinese Smugglers, and a Billion Bogus Cigarettes By Te-Ping Chen Published Online | October 19, 2008

ere in California, litical science at New Jersey’s Seton it’s possible to pass within Hall University, where he received Ha mile of the Los Angeles- a master’s degree. At age 67, he Long Beach port complex and nev- had a professorial look, with chi- er once suspect it’s there. East of nos and sweaters his preferred at- the Palos Verdes Hills, the port’s tire. May was a romantic, someone surrounding warehouses easily ob- the agents who arrested her would scure the mass of steamers that later describe as a “true lady,” one daily arrive studded with stacks of who loved ballroom dancing, wore containers bearing international pantsuits, and fastidiously watched cargo. her weight. Yet the complex is the busiest in But the pair wasn’t quite what America, the arrival point for nearly they appeared. By the time the half the volume of all U.S. imports. FBI arrested them in August 2005, And it’s here that, like so many oth- the Lius had led a team of agents er smugglers, Charles and May Liu straight into the heart of a vast Chi- first struck gold. nese smuggling network — one that By all accounts, the Lius were sold, among other goods, counter- not extraordinary. After emigrating feit pharmaceuticals, fake $100 from China around 1980, the pair bills, and weapons from North Ko- settled into the Washington, D.C., rea. And then there was their real suburb of Gaithersburg, Maryland. gold mine: cigarettes. Low-grade, Charles was quiet, a student in po- brand-name counterfeits. Over

3Artcl i e 6 of 194 Show Contents 5Pg a e 1 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity a billion of them, all told — more to penetrate, with networks insular than enough to supply every man, and compartmentalized. “The per- woman, and child in America’s 50 son in a warehouse who’s responsi- largest cities with a pack. ble for receiving the containers [of Like drug trafficking, the trade cigarettes] only knows what they in fake cigarettes is big money. need to know,” said Kevin Kozak, While in China it costs as little as deputy special agent in charge of $125,000 to manufacture a 40-foot the U.S. Immigration and Customs container of cigarettes (or 10 mil- Enforcement investigations office lion individual sticks), here in the in Los Angeles. “Try coming in with United States, such a container’s a warrant then, and you have no contents can be sold for as much case.” as $2 million. Historically, several “You have to be patient,” he said. U.S. multinational tobacco com- Undercover FBI agents Lou panies, notably R.J. Reynolds and Calvarese, Jack Garcia, and Tom Philip Morris, dominated the global Zyckowski know a lot about be- cigarette smuggling trade alongside ing patient. For six years, the trio British American Tobacco. Yet since painstakingly worked to cultivate a series of exposés and multibillion- Charles and May Liu’s confidence. dollar lawsuits in the European Over the course of some 1,000 Union and the U.S. clamped down meetings, their investigation — on such activities after 2000, the dubbed “Operation Royal Charm” United States has itself become a — would pull the agents deep target for a new wave of smugglers into a tangled Chinese underworld who have stepped in to fill the in- spanning coasts and continents. dustry’s shoes. Together with a parallel California Today, with less scrutiny from case, “Operation Smoking Dragon,” law enforcement than drug traffick- the twin investigations would result ing and lighter penalties for those in 10 indictments, with 87 individu- caught, the cigarette smuggling als charged, mostly ethnic Chinese. business is a bonanza for organized “We really got to see a network of crime syndicates, everyday crooks cigarette smugglers up close,” said — and even terrorist cells. Garcia — who, like the other agents, As with drug smugglers, ciga- has since retired and is sharing his rette smuggling rings are difficult full story with a reporter for the

3Artcl i e 6 of 194 Show Contents 5Pg a e 2 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity first time. “It’s sophisticated, the As it turned out, the ruse was way it works. And these guys are easy. The Lius, evidently, had never like hookers,” he said. “There’s a lot dealt with the Italian Mafia before. of them.” When the agents assured them that Calvarese, Garcia, and Zyck- as mobsters, they knew corrupt of- owski — based out of Atlantic City, ficials at the Newark port, the cou- New Jersey — first heard from an ple easily absorbed the story. After Italian informant about Charles and their containers had been seized in May Liu in 1999. The informant California, the Lius figured they’d had fingered the pair as cigarette try their luck elsewhere. A deal was smugglers, wheelers and dealers made: For $60,000 per container, who’d been sneaking counterfeit the agents would guarantee deliv- smokes into the Los Angeles and ery of their cigarettes. Long Beach ports. But authorities And, gradually, a friendship was had lately intercepted a few of their struck. “From the time I first met containers. The couple might be re- her, May actually started to kind ceptive to an offer of assistance at of fall in love with me,” Zyckowski the ports, the informant intimated said. “Well, not me, exactly. It was — that is, from the right kind of in- the Italian wise guy she liked.” dividuals. Those feelings, Zyckowski said, had At a formidable 6 feet 4 inches real roots — though nothing ever and 375 pounds, Zyckowski (or came of them. “Charles was often “Z-man,” as his targets knew him) away in China, always focused on thought he could play the part. A their business,” Zyckowski said. “I longtime undercover agent, he was think she was lonely. In some ways, used to adopting the braggadocio I think she just wanted companion- needed to pose as a member of the ship.” Italian Mob. Some shiny suits, a pair of Cadillacs retrieved from the FBI’s “CHINESE BEVERLY HILLS” stock of impounded vehicles, and a purple Porsche Carrera — seized Fifteen miles east of Los Angeles from a drug dealer with only 7,000 lies the San Gabriel Valley: a cluster miles on it — gave him and his fel- of low-slung, palm-lined suburbs low agents all the other panache variously nicknamed Little Taipei, they needed. New Chinatown, and the “Chinese

3Artcl i e 6 of 194 Show Contents 5Pg a e 3 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity Beverly Hills.” The area is heav- Today, China is the world’s biggest ily immigrant, its streets lined with producer of counterfeit cigarettes, stores bearing bleached Chinese churning them out at a rate of characters advertising everything roughly 200 billion sticks per year, from dentists to dumplings. Around according to smuggling experts. here, Chinese so heavily dominate That was mostly news to Hamer. the valley that one auto shop work- Nevertheless, with his over 20 years er quips, “The of experience infiltrating groups Today, China best way to learn from La Cosa Nostra to the Russian is the world’s English is to go to Mafia, Hamer’s supervisors assured biggest jail.” him he was the man for the job. Like his coun- “Asians respect age,” they told him. producer of terparts in At- “We need you.” counterfeit lantic City, FBI “At the time, I was only 52,” cigarettes. agent Bob Hamer Hamer recalled, hardly flattered. knew little about But in September 2002, he adopt- the Chinese trade in counterfeit ed a tottering gait and a cane, and cigarettes. But by the time he was with good grace went to meet his tapped to become the West Coast first target: Willon Kow Szeto. A undercover agent in “Smoking 68-year-old father from Rosemead, Dragon,” he’d heard about it. Since one of the San Gabriel Valley’s ma- the late 1990s, when Chinese coun- jority-Asian towns, Szeto had been terfeiters first developed the abil- smuggling containers of cigarettes ity to mimic the holograms used to into the Los Angeles-Long Beach indicate legitimate packs, the in- port complex along with several dustry has accelerated. “In China, associates living in the San Gabriel counterfeiters provide economic Valley, including Dong Jie Li, 31, benefits [such as jobs],” said former from China, and her 52-year-old tobacco industry consultant Tai- Taiwanese boyfriend, Giashian Lin. Ming Cheng, “so there’s always been Apart from the occasional con- a disincentive to crack down.” And tainer customs managed to confis- greased by the generous amounts cate, business was good. “If they of official payoff (the cost to bribe sent 10 containers over and could a container out of China runs about get half of them through, they were $20,000), the trade is flourishing. happy,” Hamer said. “And overall

3Artcl i e 6 of 194 Show Contents 5Pg a e 4 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity [customs] really inspected so few detained that afternoon, though not anyway.” Nationally, about 22 per- for long. Much to the chagrin of his cent of containers entering U.S. sister-in-law, Lin’s brother agreed ports undergo some level of inspec- to put up $50,000 secured by their tion upon arrival — either an X-ray $248,000 Monterey Park home for scan or a random-box search. But bail. while port-by-port numbers aren’t Five months later on September released to the public, one customs 16, 2002, FBI agent Hamer sat in a officer at the Los Angeles-Long posh Beverly Hills restaurant with Beach ports estimates the local Szeto, eating campanelli puttanes- figure is considerably lower: some- ca and talking about his supposedly where closer to 13 percent. After corrupt port “contacts.” After some all, every day, over 15,000 contain- negotiations, Hamer promised to ers stream into the port complex — guarantee Szeto’s shipments for or one every six seconds. $60,000 per container. Even so, one of Szeto’s associ- That same day, Lin strode into ates — Lin — had lately been ar- the gleaming Los Angeles Inter- rested. Not because one of his national Airport with a substitute containers was detected. Instead, passport he’d obtained from the lo- a couple flying into the Los Ange- cal Taiwanese Consulate. He went les airport in April that year were to the counter and bought a one- the ones to give the tipoff. When way ticket to Shanghai. He boarded security officials discovered that a plane an hour later. their suitcases contained 2 million phony California cigarette tax A COUNTERFEIT GOLD MINE stamps from Xiamen, China — to be affixed on likewise phony packs Meanwhile back in New Jersey, Cal- — they also discovered the name of varese, Garcia, and Zyckowski were their intended recipient: Lin. Upon getting impatient. Intent on expand- raiding Lin’s apartment, they found ing the case, the agents continued to shipping documents linking him to bring in more cigarettes for the Lius 16 million counterfeit cigarettes — 10 shipments by September 2003, that had turned up at the ports list- or some 100 million sticks, mostly ed as furniture and chinaware. Lin counterfeit Marlboro and Newport. surrendered his passport and was Each time, the agents helped route

3Artcl i e 6 of 194 Show Contents 5Pg a e 5 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity the cartons to the Lius’ various con- quality, their distributors had their tacts in southern California, Pennsyl- tricks. In run-down neighborhoods, vania, Canada, Illinois, and New York the Lius’ contacts would mix fakes before receiving payment (usually in with real Marlboros and sell them on paper grocery bags stuffed with $20 the streets, three sticks for a dollar. bills). “The numbers were astronomi- But at this point, the FBI wanted cal, and it was all very well-orga- more. They’d met the Lius’ partners, nized,” remembered Calvarese, including a pair who early on became the primary For each from the San agent in “Operation Royal Charm.” shipment the Gabriel Valley, For each shipment the Lius made, Lius made, they Cheng Ming Hsu they could net over $1 million. And could net over and Taiwanese by the time a container crossed U.S. national Tina soil, every carton inside — usually $1 million. And Huang. They’d about 900 cases of them — already by the time met the Lius’ had a buyer set up and distribution a container buyers and dis- pre-arranged. crossed U.S. tributors. Now, Finally, Garcia-the-mobster is- soil, every they wanted to sued an ultimatum. “If you don’t kick carton inside know who else it up a notch, we said, we’re out of the Lius knew here,” Garcia said. His drug contacts already had a — and what else in Colombia, he told them — local buyer set up their networks freedom fighters — were getting and distribution could provide antsy, demanding that Garcia pro- pre-arranged. them. duce weapons before they moved In particular, ahead with any cocaine deals. the FBI was interested in the Lius’ “It was frustrating,” Garcia said. rumored ties to Chinese weapons “But worth it. Because in the end, dealers. But the Lius weren’t giving they led us to Keith.” them up. Co Khanh Tang, or Keith, as the “The cigarettes were just such agents knew him, was a Vietnam- a gold mine for them,” Garcia said. ese-born Chinese who immigrated “That was all they were interested to the United States in 1975 and in.” Even when customers com- eventually settled in the San Gabri- plained about the cigarettes’ poor el Valley to work the Asian tables at

3Artcl i e 6 of 194 Show Contents 5Pg a e 6 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity a local casino. An avid golfer, rarely That is, near-perfect imitations of without his Tiger Woods cap, Tang U.S. Treasury bills, manufactured was quiet — in the words of one in North Korea and delivered to the agent, a real “family man.” Modest dumbfounded agents in stacks at a and discreet, even at the gambling rate of $0.30 on the fake dollar. table. When he flew out to visit with “We showed them to the Secret agents at casinos in Atlantic City, Service and the FBI,” Garcia re- he’d win thousands of dollars. But called. “And suddenly, everyone when management offered him spe- was in uproar.” cial dinners and hotel perks, he’d Still more was to come. A month shake his head and simply walk later, Tang invited the agents to away. Phuket, Thailand, to meet with his “He wasn’t at all cocky,” Garcia supernotes contact, who also dealt said. “He seemed like the kind of in heroin and weapons. It would be guy you could be friends with.” a good time, Tang reportedly prom- But at least according to agents, ised. Food, beaches — and girls. As Tang also had a murkier past as a many as the agents wanted, and all former member of a Chinese gang, day if they so desired. with the blue-inked tattoos running “At this point, I’m telling you, ev- down his back to prove it. At the erything just mushroomed, out of very least, from his days working at control,” Calvarese said. At home, the casino, he had all the connec- he kept three separate phone lines: tions he needed to draw on to make one for each of his major Chinese him the FBI’s next primary target. contacts. And every day, the phones Like the Lius, Tang wanted the continued to ring. agents’ help importing the real moneymaker: counterfeit ciga- TRICKS OF THE TRADE rettes, which he would fly out to the southeastern city of Xiamen, Three thousand miles away in Cali- China, to procure. But the agents fornia, Bob Hamer was finding him- kept pushing for other products, self suddenly popular. Since his too, and finally he caved. Through a initial meeting with Szeto, word friend in Taiwan, he managed to ob- of his port contacts had spread tain “green paper,” or what are more among other local Chinese eager commonly known as “supernotes.” for his assistance. Apart from Sze-

3Artcl i e 6 of 194 Show Contents 5Pg a e 7 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity to, there was Dong Jie Li, a pretty central Chinese government seized 31-year-old with a penchant for 9.3 billion cigarettes and rounded yaotouwan, or what the Chinese up 7,026 people in connection with call “shake-head-pills,” ecstasy. their manufacturing, mostly in the There was John Tung Wu, a heavy- southeastern provinces of Guang- set Taiwanese who dealt in crystal dong and Fujian. methamphetamine as well as ciga- And yet more sites continue to rettes. There was Alan Hwang, who spring up. The cigarette counter- sold counterfeit Nikes alongside feiting business is something of a fake Marlboros, and more smug- cottage industry in China, with mo- glers besides. “Eventually, it was bile manufacturing sites hidden in all I could do to keep them off my caves, barns, or even underground. back,” Hamer said. And the Chi- Meanwhile, since counterfeiting nese were selling to a dizzying ar- consists largely of “just-in-time” ray of characters that kept popping production, it’s difficult for au- up, as well: Armenians from Brook- thorities to make substantial one- lyn, Middle Easterners from south- time seizures. Often, the cigarettes ern California. aren’t packaged until “very late, Hamer knew who the Chinese possibly just prior to shipment,” were getting cigarettes from: said Daniel Chow, an Ohio State Giashian Lin. Since fleeing to China University law professor whose in late 2002, Lin had again assumed research has focused extensively his position as a magnate of the on Chinese counterfeiting. That trade, arranging for the shipment way, counterfeiters don’t run the of Guangzhou-produced cigarettes risk of maintaining warehouses full out of the Ningbo, Shanghai, and of brand-name contraband. Once Dalian ports. Tang placed an order, he told Ham- The Chinese cigarette trade is er, it took just four days for the powered by people like Lin: brokers cigarettes to be manufactured for who connect overseas Chinese from shipment to Los Angeles. Los Angeles to Manila to distribu- Over the investigation’s course, tors in mainland China, where illicit Hamer learned the tricks of the manufacturers churn out vast quan- smuggling trade. At the ports, tities to meet overseas demand. smugglers relied on the names of Last year alone, for example, the humdrum, low-duty products for

3Artcl i e 6 of 194 Show Contents 5Pg a e 8 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity use on phony bills of lading: wick- tions. In the car as he drove with er furniture, for example, baskets, them around the San Gabriel Val- or paper products. Frequently the ley, he had a particular soundtrack packers would assemble a false wall he liked to play for his newly made of boxes containing decoy goods to friends. He’d turn up Charlie Dan- be loaded in the iels’ “Uneasy Rider,” so they could “Cigarette back end of the all hear the lyrics and maybe sing smuggling container, the along: You may not know it but this functions better to dupe man is a spy. He’s an undercover just like a any inquiring agent for the FBI. business….It’s port official making a cur- BY THE ANDAMAN SEA a big pie, and sory physical in- everyone wants spection of the There were just two Mercedes a piece.” goods. available for rent on the tiny Thai — Kevin Kozak, He was also island of Phuket, and upon arrival ICE official struck by the in July 2004, Lou Calvarese’s hosts fierceness of the had managed to procure both of competition. “Everyone had com- them. Though Calvarese dodged petitors, and they were always bug- Tang’s offer to arrange easy female ging me to get their product off the companionship by bringing along ships to them faster,” Hamer said. another FBI agent to pose as his “It functions just like a busi- girlfriend, his hosts now seemed ness,” said Kozak, the Immigration intent on lavishing the pair with all and Customs Enforcement agent. kinds of other hospitalities. Only “There are investors here in the after a whirlwind Bangkok tour did states — street gangs or career the business meetings begin — at criminals — who pool their money the extravagant resort Le Meridian, to purchase and contract the con- situated in a brilliantly colored cove tainers for a very calculated payoff. by the Andaman Sea. It’s a big pie, and everyone wants a Jyimin Horng was the star of the piece of it.” trip, Tang’s contact and the man By this time, Hamer was enjoying that Calvarese had come to see. A himself, riding out this strange wave short, stocky judo expert from the of smugglers anxious for his atten- gambling enclave of Macao, China,

3Artcl i e 6 of 194 Show Contents 5Pg a e 9 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity Horng was rumored to have com- had likewise begun to tempt him peted in the Olympics in the 1980s. with offerings of supernotes, crys- Now he served as a go-between for tal meth, and even surface-to-air the North Korean government and missiles. various clienteles, peddling super- By the time terrorists bombed notes and arms. There in Phuket, the London subway in July 2005, the between bouts of swimming and be- agents were ready to take the group neath swaying palm fronds, Calva- down. Their targets were spooked rese and Horng began negotiations by the attacks, afraid that law en- that eventually led to the purchase forcement would be on heightened of $1 million in supernotes and a alert. And besides, as Zyckowski contract for 1,200 AK47s, 75 anti- said, “It just got to a point where tank rockets, 50 rocket launchers, there was no way we could control and 100 machine guns with silenc- it anymore.” ers — all through Horng’s North After all, as he added, “How do Korean contacts. you keep 90 people dangling on a “Everything was on the table, hook?” and everything was for sale,” Calva- rese said. ABOARD THE ROYAL CHARM Phuket, he remembers — with its bare stretches of beach and languid The first wedding invitations were air — was a dream. It also was the mailed out that summer. Addressed beginning of the end for Operations to subjects across China, the Unit- “Royal Charm” and “Smoking Drag- ed States, and Canada in delicate on.” After Calvarese returned to the script, the cards announced that United States, the evidence contin- Calvarese and his phony FBI girl- ued to pile up: a weapons catalogue friend — Melissa Anderson — were Horng sent to Calvarese, a half-inch to be wed on August 21. The cer- thick, translated from the Chinese, emony would take place aboard a more shipments of cigarettes, and yacht off of picturesque Cape May, over $3 million in supernotes that New Jersey: a yacht, the invitations arrived into the Newark port, the declared, named “Royal Charm.” bills tucked and carefully hidden Transportation to the wedding in boxes of toys. Meanwhile out on would be provided. the West Coast, Hamer’s subjects Back in Los Angeles, Bob Hamer

3Artcl i e 6 of 194 Show Contents 5Pg a e 10 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity readied his own bait: a divorce par- Meanwhile, across the United ty. He told his targets that his wife States, authorities in other cities had left him, and invited them all to were springing into action. All in a massive get-together on August all that weekend, some 59 targets 22 at the Playboy Mansion for some were arrested in 11 cities during consolatory festivities. the sweep, including Szeto, Li, Wu, None of the suspects ever made and Chen in California. (Several it to either celebration. In Atlan- other targets, including Cheng Ming tic City, the agents spent the days Hsu and Giashian Lin — overseas in in the run-up to the wedding with China — were never captured.) Charles Liu, Tang, and Horng, The case had ended. But not reveling at different restaurants, without a certain poignancy. A few hamming it up. At a three-hour re- days before the arrests, Horng and hearsal dinner at Caesar’s the night Tang took Calvarese aside to pres- before the wedding, the agents and ent him with a gift: two gold Rolex their targets ordered a $4,000 meal: watches for himself and his bride. shrimp cocktails, caviar, bottles of As they watched his face expec- Don Perignon. Melissa flashed a tantly, Calvarese tried to laugh. 4-karat diamond engagement ring “Keith — these aren’t counterfeit, on her finger, on loan from the FBI. are they?” he asked. “No,” Tang re- Garcia played best man. The room plied soberly, “these are the real was buoyant with toasts and laugh- deal.” er: To you, Lou! Big man Jack: How “It was really nice,” said Calva- does it feel to see him as a married rese, looking back. “You could see man? in their faces that this was some- The next morning, two limos thing they really wanted to do for were ordered to arrive at the Taj us. In a way, it was sad.” Mahal hotel, where about a half- dozen smugglers awaited rides to A “CLASSY, CLASSY WOMAN” the ceremony. Agents impersonat- ing drivers sat behind the wheel, This past August, sitting in his liv- arrayed in full tuxedo. As the limos ing room in San Gabriel, Keith Tang pulled away, the agents told the was at first reluctant to talk. While guests they had to make one more Tang had pleaded guilty, along with unexpected stop: to be booked. many of the 87 charged on both

3Artcl i e 6 of 194 Show Contents 5Pg a e 11 of 126 Tobacco Underground: Part One | China ©2009 Center for Public Integrity coasts in connection with “Smok- tenced to three-and-a-half and four ing Dragon” and “Royal Charm,” his years, respectively. Charles will sentence had not yet been issued. be released in 2017. Charges were But when his words finally did tum- dropped against May Liu, who suf- ble out, they emerged in a rush. fered a massive stroke in 2004 that “We didn’t hurt people,” he said. paralyzed her entire left side. “We don’t kill people. We just try Looking back, on some level, to bring cigarettes over and make Zyckowski said, he does feel bad some money. Everyone was doing about what happened to all of them. cigarettes to survive. We’re just “You get to like certain people,” he Asians trying to help each other, said. “You know, they’re not mon- and they’re calling us a gang.” The sters — they’re businessmen.” tattoos on his back, he said, aren’t For the other agents, a fondness gang-related — they were inscribed for the smugglers likewise lingers. on him as a teenager by a Buddhist Garcia, in particular, recalls May as monk. a “classy, classy woman,” — gra- “All I wanted to do was ciga- cious, always with a matching pock- rettes, to make a living for my kid,” etbook and immaculately made up. Tang said. Across the room, a Guitar “They were almost like someone’s Hero game rests on the floor, near a grandparents,” he said of the Lius. red-lit family shrine festooned with “But that’s how it was with all of incense and green mangoes. “I told them,” he said. “You’d never sus- [the agents], ‘I don’t want to get pect that they were big-time smug- involved with weapons and coun- glers. Not in a million years.” n terfeit money, I’m not that kind of guy,’” he said. “But they kept pushing me.” “It’s a game,” he said. “We’re all just chips in the game. And I lost.” (In September, Tang was sentenced to six years in prison.) So far, Dong Jie Li, Jyimin Horng, and Charles Liu have also all pleaded guilty, with Li and Horng sen-

3Artcl i e 6 of 194 Show Contents 5Pg a e 12 of 126 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity Smuggling Made Easy Lndlockeda Paraguay Emerges as a Top Producer OF Contraband Tobacco By Stefan Candea, Duncan Campbell, Vlad Lavrov, and Roman Shleynov Published Online | June 28, 2009

uar í a sits on the edge of the Gsluggish, muddy, mile-wide Paraná River that cuts a natural border between Brazil and Paraguay. Here the soil is red, the terrain is flat with ample soybean and mate leaf plantations. On its face, Guaíra is a well-kept Western Brazilian city of 30,000. Men chatter among themselves sitting in small Smugglers have used this dock on the Paraná plazas and barber shops. River, located by a Paraguayan Navy post, to The streets downtown are move cigarettes to Brazil. clean, the houses are fresh- Credit: Marina Walker Guevara ly painted and pay phones are decorated with natural motifs — headlines across Brazil when 15 peo- you can call from the gut of a fish or ple were murdered at a makeshift the chest of a parrot. riverside warehouse. The killings Beneath this surface, however, were the result of a vendetta among the city shows a more disturbing ele- drug smugglers and, officials here ment. say, they weren’t all that unusual. Last September, Guaíra made Just 150 miles north from the noto-

3Artcl i e 7 of 194 Show Contents 5Pg a e 1 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity rious Tri-Border Area, where Bra- zil, Paraguay and Argentina meet, A Runaway Guaíra is today a major weapons and drugs corridor in the region. But no Tobacco Industry product, police say, is more widely Paraguay’s factories produced an smuggled through this city, and estimated 68 billion cigarettes in more profitable to smugglers, than 2008, more than 20 times what Paraguayan cigarettes. the country consumes. The vast Dozens of motor boats crammed majority—$1 billion worth—is with tobacco cross the Paraná River smuggled abroad, mostly to Brazil daily from the neighboring Para- and Argentina. guayan city of Salto del Guairá. The smugglers feed an illicit trade that injects billions of cigarettes into Sao Paulo, Rio de Janeiro, and other large Brazilian cities, where the cheap, untaxed Paraguayan sticks account for 20 percent of the entire cigarette 65 Billion Smuggled market. Guaíra sits at the heart of this trade, a strategic gateway and a place where many residents — up to half its population, locals say — rely directly or indirectly on smuggling 3 Billion Consumed for their livelihood. A few reap mil-

lions from the illicit trade. Guaíra’s Note: Paraguay also imported 3.2 billion cigarettes most famous criminal son, Roque and legally exported 2.5 billion cigarettes in 2006. Fabiano Silveira, made a fortune and Source:Centro de Investigación de la Epidemia de a name, trafficking Paraguayan ciga- Tabaquismo rettes thousands of miles away. Graphic by Stephen Roundtree Silveira, 44, nicknamed Zero Um (“The Kingpin”), is a larger-than-life rette business took off, and in 1999 border boss who fled to Paraguay he opened a sizable cigarette factory after being charged in Guaíra with on the outskirts of the country’s cap- orchestrating the 1996 murder of a ital, Asunción, which soon became businessman. In Paraguay his ciga- the operational base for a smuggling

3Artcl i e 7 of 194 Show Contents 5Pg a e 2 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity network that spanned two conti- the world’s top producers of contra- nents and reached deep into the band cigarettes, responsible for 10 United States. Starting in 2003, Sil- percent of the world’s contraband veira cut deals with tobacco traders tobacco, experts estimate. in Arizona and smoke shop owners Paraguay’s factories churned out in Indian reservations in Washington 68 billion cigarettes in 2006, more state to smuggle millions of Para- than 20 times what the country guayan-made contraband cigarettes consumes, according to a study by through the ports of Miami, Norfolk, the Centro de Investigación de la and Baltimore. The sticks were then Epidemia de Tabaquismo (CIET), a distributed across the country and Uruguay-based NGO that tracks the the profits were laundered to bank economics of the region’s tobacco accounts in Paraguay and the United market. The vast majority of the ciga- States. Silveira not only manufac- rettes — up to 90 percent of produc- tured the cigarettes, U.S. prosecution, worth an estimated $1 billion tors said, but also greased political — disappears in the black market, and law enforcement hands in South law enforcement officials say. The America that guaranteed swift pas- cigarettes are flooding Brazil and Ar- sage north for the cargoes. His for- gentina, where taxes are much high- mer associates describe him as smart er than in Paraguay, and have turned and cold, with an eye for fine suits. up as far away as Ireland. The tale of Roque Silveira is em- blematic of the criminal nature and FIDEL, HAMLET, AND OPUS DEI global reach of the teeming Para- guayan cigarette industry, one that Once dominated by multinational experts and law enforcement of- tobacco companies, the global il- ficials say is, largely, set up for and licit cigarette trade today involves devoted to transnational smuggling. an array of crime syndicates which, Fifteen years ago cigarette manufac- much like the Silveira network, rob turing was minimal in Paraguay, one governments of billions of dollars in of South America’s poorest countries much-needed tax money, fuel orga- and a place notorious for corruption nized crime, and help spread addic- and trading in counterfeit goods. tion by placing cheap cigarettes in Today Paraguay, a landlocked, Cal- the world’s black markets. The steep ifornia-sized country, ranks among growth of Paraguay’s cigarette in-

3Artcl i e 7 of 194 Show Contents 5Pg a e 3 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity dustry alarms law enforcement agen- cigarettes are shipped to known Ca- cies and health officials alike, who ribbean smuggling hubs like Aruba fear that the South American nation and Panama, where they believe the could become be the next nightmare shipments enter the black market. in global cigarette trafficking. Indus- In 2006 Irish customs seized a con- try sources say manufacturing ciga- tainer loaded with five million Para- rettes in Paraguay today is cheaper guayan cigarettes concealed in bales than in China — the top producer of plywood. While making inquiries of contraband smokes — while the about the case among his EU peers, quality of the product is far superior. David Godwin of Irish Customs says “There is a real danger that this he was told: ‘If you think you have situation could escalate very rapid- problems with China, the Middle ly,” says Austin Rowan, head of the East, and the rest, brace yourself be- anti-tobacco smuggling operations cause you haven’t seen anything. … at the European Union’s Anti-Fraud The capacity is just endless in South Office (OLAF). What’s distinctive America.’” about Paraguay, investigators say, Tobacco factories in Paraguay is the massive number of obscure, range from sprawling, state-of-the- cheap brands its factories produce art manufacturing plants that boast — more than 2,600 brands have cutting-edge technology to minia- been registered with the Ministry of ture “mobile” factories — also called Industry and Commerce, including submarines — which are assembled the likes of “Dirty,” “Fidel,” “Ham- inside of trucks. Paraguayan govern- let,” and “Opus Dei” — which makes ment officials say that if all cigarette- it harder for investigators to track making machines in Paraguay were the trade. In contrast, only a handful to work at maximum output, the of local brands are sold in the domes- country could produce up to 100 tic market, where smokers pay some billion sticks annually — enough to of the lowest cigarette taxes in the supply about two-thirds of the Bra- world. zilian market. Multinational tobacco firms are Smuggling is made easy in Para- alarmed at the size and speed at guay, officials confide. There is vir- which the Paraguayans have built up tually no industry regulation, and an off-the-books industry. Investiga- illegal manufacturers and traffickers tors for Big Tobacco say Paraguayan are often insulated from prosecution

3Artcl i e 7 of 194 Show Contents 5Pg a e 4 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity by those in power. Bankers, politi- — from CDs to Viagra — this region cians, and soccer club barons are of thick, green rainforests and spec- themselves involved in the business tacular waterfalls has also become and make hefty campaign contribu- the backdrop for the booming trade tions. Although the administration in smuggled and counterfeit ciga- of President Fernando Lugo — a rettes made in Paraguay. former Catholic bishop who in 2008 “The only thing that flourishes unseated the powerful Colorado here is illegality,” says Humberto Party after more than 60 years in Rosetti, a prosecutor in Ciudad del power — has pledged to change the Este, the commercial center of the country’s reputation as a smuggling Tri-Border Area, often regarded haven, there already have been some as one of the most lawless places mishaps. In February, the president on earth. The city’s downtown is a named a convicted cigarette smug- bustling labyrinth of narrow streets gler as his Air Force intelligence cluttered with thousands of street chief. Lugo later backed off amidst stands, money exchange houses and intense criticism. shops, where anything from exotic pets to AK-47s can be obtained with almost equal ease. Late-model Mer- A SMUGGLER’S PARADISE cedes and BMWs sporting polarized Cigarettes are just another com- windows rush by and scores of motor modity peddled through Paraguay’s scooters, some of them transporting decades-old underground economy, entire families, weave through the which flourished during the 35-year ubiquitous traffic jams. In the Calle dictatorship of Alfredo Stroessner. de los Cigarrilleros, as locals have Before he was forced from power in christened one of the city streets, 1989 in a military coup, Stroessner boxes of Eight, Te, Rodeo, Calvert made the country a sanctuary for — the smugglers’ favorite brands Nazi war criminals, deposed dicta- — are stacked high along the side- tors, and smugglers. walk. “Our hands are pretty much The Tri-Border Area of Paraguay, tied,” says Rosetti, who has directed Brazil, and Argentina is the epicen- several cigarette seizures in recent ter of this contraband culture. A months, only to see judges and cus- corridor for drugs, weapons, stolen toms officials promptly return the cars, and any imaginable knock-off loads to smugglers.

South America’s Smuggling Hub Paraguay ranks among the world’s top producers of contraband cigarettes, feeding illicit markets across Area Latin America. The notorious Tri-Border area—where of Detail Argentina, Brazil and Parguay meet—sits at the core of the trade.

PERU BRAZIL

BOLIVIA

São Pacific Paulo Ocean PARAGUAY CHILE Guaíra Asunción Foz do Iguaçu

Ciudad del Este Atlantic Ocean

To the Caribbean, URUGUAY Europe and North America ARGENTINA

0 500 Kilometers

Source: International Consortium of Investigative Journalists www.icij.org

Graphic by www.stephenrountree.com

3Artcl i e 7 of 194 Show Contents 5Pg a e 6 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity U.S. officials regard Paraguay as a principal money laundering center for the proceeds of drugs, arms, and cigarette trafficking in South America — and Ciudad del Este sits at the core of that trade. Cigarette factories are often linked to money exchange houses where profits of the contraband are laundered, according Brazilian customs pulverize 500,000 packs to former factory manag- of seized cigarettes a day. Remains of ers and court records. So contraband cigarettes are later used in impenetrable is Ciudad fertilizers and to build roads. del Este’s financial system Credit: Marina Walker Guevara that American undercover agents who infiltrated Roque Silvei- trols at the border in 2005, so smug- ra’s U.S. smuggling ring were unable glers switched from the road to the to find the money they helped the water. Starting at dusk, motor boats group launder. “We tried to track leave through any of the more than the proceeds,” says Assistant U.S. 300 makeshift piers fashioned along Attorney James Warwick. “Did we the nearby Lake Itaipú, formed by succeed? No.” the dam of one of the world’s larg- Several Paraguayan cigarette est hydrological power plants, built firms have conveniently built facto- on the Paraná River. To reach some ries in Ciudad del Este and nearby of these illicit piers, one must navi- Hernandarias. From there, cigarettes gate a maze of tortuous and narrow for years were smuggled to Brazil in red-dirt paths through dense under- vans, trucks, and buses through the brush. One afternoon in March, ICIJ shabby Friendship Bridge that con- reporters visiting the seemingly de- nects Ciudad del Este with its Bra- serted Codorso Pier came across a zilian counterpart, the city of Foz do government worker smoothing out Iguaçu. Brazilians stepped up con- the smugglers’ trail with the help of

3Artcl i e 7 of 194 Show Contents 5Pg a e 7 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity his tractor. Reporters were told the (PCC), the leading criminal gang in smugglers were taking the day off Sao Paulo prisons. to mourn one of their own, a former policeman, who had died in a car ac- THE TRADE GOES GLOBAL cident the day before. “We close one pier, and two more International smugglers quickly pop up overnight,” says Gilberto spotted an opportunity in the boom- Tragancin, chief of Brazil customs ing Paraguayan illicit tobacco trade. service in Foz do Iguaçu. With a Washington state-based cigarette shoreline of nearly 1,000 miles, Lake wholesaler Stormmy Paul, a Tulalip Itaipú is almost impossible to patrol Indian, flew to Paraguay in 2003 to in its entirety, Tragancin explains. A cut a deal. He had been buying Chi- few yards outside of Tragancin’s of- nese cigarettes, including counter- fice, a ‘cigarette trashing’ machine feit Marlboros, and re-selling them was in motion. The loud contraption tax-free to smoke shops in his state, pulverizes about 500,000 seized ciga- but he wanted a better combination rette packs every day — the remains of price and quality. A business part- of which are used in fertilizers and to ner from Brazil offered to make some build roads. The flow of Paraguayan introductions south of the border. contraband cigarettes to Brazil is 20- In Paraguay, Paul visited a hand- 30 billion sticks annually, experts es- ful of cigarette factories. One facility timate. In contrast, says Tragancin, stood out: the heavily guarded Tab- legal exports of cigarettes to Brazil acalera Central in the outskirts of are zero. Asunción. The visitors were greeted Besides the public health threat by owner Roque Silveira and feted it poses, cigarette smuggling is also with a lavish barbecue. By the time bolstering violent organized crime dinner was completed an agreement groups that operate complex net- had been sealed. Paul would pay $2 works along the border with Brazil. for each carton of cigarettes manu- Tragancin says these groups are factured at Silveira’s facility and an now using the cigarette smuggling additional $2 per carton to a middle- channels to supply weapons and man in Maryland who altered cus- munitions to some of Brazil’s most toms forms to avoid controls, and dangerous syndicates, including taxes, at U.S. ports. The deal still left the First Command of the Capital Paul a $2 per-carton profit.

3Artcl i e 7 of 194 Show Contents 5Pg a e 8 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity “I loved it down there,” said Paul, in one of the largest-ever cigarette an enterprising, voluble fellow who smuggling investigations in that leads a weekly ritual at a sweat lodge country. Codenamed Operation Fire- on the Tulalip reservation, north of ball, the sting rounded up more than Seattle. He found Silveira impres- 90 people in 11 Brazilian states. In sive. “He is a really sharp business the indictment for the case, Silveira guy,” said Paul of Silveira. “There is was fingered as a major supplier of a certain class about him — Roque contraband cigarettes who allegedly looks successful.” controlled three different networks Starting in late 2003, the ring of that delivered the sticks to the popu- 11 people, most of them American lous Rio Grande do Sul state. Silveira tobacco traders, smuggled into the managed to evade the law simply by United States more than 120 mil- staying in Paraguay, where, Brazilian lion Paraguayan cigarettes, for dis- prosecutors alleged, he has “a vast tribution from California to North network of contacts and the financial Carolina, according to court records. capability to live underground.” The ring was brought down in spring Silveira had become the top dog 2005 as the smugglers convened in in the traffic of cigarettes from Para- Las Vegas. Silveira, Paul, and the guay to Brazil following the 2003 others were indicted on a total of arrest and subsequent conviction 50 counts of conspiracy, smuggling, of legendary cigarette smuggler Ro- trafficking, and money laundering. berto Eleuterio “Lobão” Da Silva, a U.S. officials jailed Silveira for two Brazilian who wore plenty of bling months after his arrest at the Miami and looked like Mr. T, Brazilian po- airport, but the Brazilian pledged to lice say. From that point on, in smug- cooperate with authorities and was gling parlance, Silveira “owned” the handed a probationary sentence. Sil- routes that led to millions of smokers veira paid a fine and, to the amaze- in Brazil’s largest cities. ment of Paraguayans, was let go. Two weeks after Operation Fire- ball, a Brazilian customs agent was murdered in a bleak, sparsely popu- RIVER OF THE DEAD lated region of the border called Rio Around the same time the Ameri- do Morte — River of the Dead. An cans gave Silveira a slap on the wrist, anonymous caller tipped local police Brazilian prosecutors indicted him to a burned-out SUV on the road. So

3Artcl i e 7 of 194 Show Contents 5Pg a e 9 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity charred was the corpse in the pas- officials announced the arrests, they senger’s seat that police couldn’t addressed Silveira directly, calling readily identify the victim, who had him “the big head” of cigarette smug- been burned alive. Forensic ex- gling in the region. “Everything hap- perts eventually said the dead man pens under his orders,” they said. was Carlos Renato Zamo, a resident Through his attorney in Asunción, of Mundo Novo, a city just north of Silveira declined to comment for this Guaíra. He was one of thousands article. of customs agents working Brazil’s porous borders. Throughout the FILLING BIG TOBACCO’S SHOES years, however, Zamo reportedly had grown far richer than most on a Paraguayan cigarette manufactur- typical border agent’s salary. He ac- ers like to point out that they are cumulated real state investments in just filling a void created by large Sao Paulo and Mato Grosso do Sul. multinational tobacco companies. In He even owned a plane. the 1990s, British American Tobacco Brazilian police discovered that and Philip Morris ran independent Zamo had worked for Silveira and schemes in which their subsidiaries other cigarette smugglers, who alleg- in Brazil and Argentina legally ex- edly paid the agent $8,000 a month ported billions of cigarettes to Para- to assure their cigarette cargoes guay. The sticks were then smuggled passed uninspected through border back to these two higher-tax coun- checkpoints. But Zamo had begun tries and sold on the black market. to fear discovery and finally backed The practice ended in 1999 when out of the ring, police said. In a meet- the Brazilian government raised the ing, the smugglers allegedly offered cigarette export taxes dramatically to raise his payment, but he refused to discourage the illegal trade. Fol- and tipped off customs about the lowing the tax increase, dozens of group’s shipments, according to Bra- cigarette factories opened in Para- zilian police. guay, many of them owned fully or Four men were eventually arrest- in part by Brazilians. Within three ed in connection to Zamo’s murder, years, Paraguay was home to more but not Silveira, who was wanted by than 30 cigarette manufacturing Brazilian authorities but remained plants, some of which counterfeited at large in Paraguay. The day police well-known international brands.

3Artcl i e 7 of 194 Show Contents 5Pg a e 10 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity The local counterfeiting business has dropped mark- edly in recent years as cigarette makers realized that there was a market — in Brazil and around the world — for the cheap Paraguay- an brands. The practice also carries less risk of being pursued by Big Tobacco companies for trademark violation. Today the number Tabacalera del Este, Paraguay’s top cigarette of manufacturing facilities factory, features German machinery that can has more than halved, but assemble 350 packs a minute. not so production. Credit: Marina Walker Guevara Tabacalera del Este (Ta- besa) Paraguay’s top cigarette fac- in Operation Fireball as one of the tory, a modern, sprawling 183,000 factories whose cigarettes were alleg- square-foot facility that can pump out edly smuggled to Brazil. up to 1.5 billion cigarettes a month — Paraguayan businessman Horacio or 579 cigarettes per second. The fac- Manuel Cartes is widely reported to tory, located a short drive north from be the owner of Tabesa, and is listed Ciudad del Este in the city of Hernan- as a top shareholder and director by darias, supplies almost half of the Par- Informconf, a Paraguay business da- aguayan market with its two flagship tabase. Cartes started as a cigarette brands, Kentucky and Palermo. But distributor two decades ago. Since at the same time as it serves a legiti- then he has built an empire that in- mate market, the company allegedly cludes a bank, a soccer club, and sev- supplies large quantities of cigarettes eral agricultural ventures — some that end up smuggled to Brazil and of these formally owned by family Argentina. Customs officials in those members and business associates. two countries told ICIJ they seize Tabesa’s CEO José Ortiz talked to more contraband cigarettes from Ta- ICIJ reporters about the company’s besa than any other Paraguayan com- business. pany. In 2006, Tabesa was mentioned “We don’t know where our ciga-

3Artcl i e 7 of 194 Show Contents 5Pg a e 11 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity rettes are consumed, and it’s not and California . Palermo is also avail- our problem,” said Ortiz when asked able online through websites selling about the presence of Tabesa’s ciga- cigarettes from Indian reservations rettes in Brazil and Argentina, two in New York, but Ortiz denied that markets to which the company does Tabesa is selling to Native Americans not legally export. “We sell our prod- directly. U.S. officials have identified ucts in Paraguay and pay all local New York reservations as major hubs taxes,” he added, sitting in his of- for cigarette smuggling. fice at Tabesa’s manufacturing plant, which features high-end German GUAÍRA: NO MAN’S LAND cigarette machinery. What happens once the cigarettes leave the factory Brazilian prosecutors and police is not Tabesa’s responsibility, said place the Paraguayan factories at Ortiz, a view shared by other ciga- the top of the “criminal enterprise,” rette makers in Paraguay. “My job is which they say runs high-volume to supply the market.” cigarette smuggling in the region. Ortiz said that Tabesa does not Érico Saconato, head of the Brazil- sell directly to vendors but rather to ian federal police in Guaíra, said that four or five wholesale distributors. the factories work hand in hand with He named two wholesale firms, one “managers” on both sides of the bor- of which, Tabacos del Paraguay, is der who acquire trucks and boats, affiliated with Tabesa. “The rest, I bribe public servants, and hire scores don’t remember,” he said, reclining of youths, fishermen, and farmers to on his large black leather office chair transport the cigarette loads. In one and switching the focus to multina- of the cases involving Silveira, pros- tional tobacco companies: “They are ecutors said in court documents that the parents and the grandparents the ring acquired large quantities of of the creature,” said Ortiz of BAT contraband cigarettes “directly from and Philip Morris’ smuggling in the the Paraguayan factories” for distri- 1990s. “We are replacing that market bution in Rio Grande do Sul and bor- they abandoned.” der cities of Argentina. Last year, the company broke into “All the smugglers, big-time traf- the U.S. market with its Palermo fickers, in this region are business- brand and is now certified to sell in at men and politicians, who have good least eight states, including Maryland lawyers, fancy cars, family,” says

3Artcl i e 7 of 194 Show Contents 5Pg a e 12 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity Saconato. “Some even are leaders of In the kiosks of Sao Paulo or Rio de evangelical churches.” Janeiro, the cheapest Brazilian ciga- Roque Silveira’s hometown of rette pack (valued at roughly $1.50) Guaíra gained prominence in the costs three times as much as the cigarette trade when controls tight- contraband Paraguayan brands. ened in the Tri-Border Area, starting in 2005. Today large portions of “A BIG DUTY FREE STORE” the population there, Guaíra officials say, rely on smuggling for their live- No policeman in Guaíra has seen Sil- lihood, whether it’s renting space veira in recent years, Saconato says. in their homes for the smugglers to He has become a mythical character store their loads, working as look- of sorts, with town residents claim- outs, or passing cigarettes across ing from time to time to have spot- the Paraná River. The “paseros,” or ted him. His 1996 murder case is still crossers, make about $300 a week, meandering through Guaíra’s courts. one and a half times the minimum After Operation Fireball, Silveira be- monthly wage in Brazil. came a ghost, Brazilian police say, Police in Guaíra say they feel but no one believes he has retired overwhelmed. Saconato says 700 from the cigarette trade. Some of Sil- people were arrested in 2007 in con- veira’s former associates now man- nection with smuggling, yet only two age large portions of the smuggling men were convicted. When the dis- on both sides of the border, accord- trict attorney shut down a riverside ing to Brazilian police. bar, Tininha’s, which allegedly was The latest traces of Silveira in widely used by smugglers to plan Paraguay’s courts are from July 2007, their business, a federal prosecutor when he beat the legal system again. reversed the order and sued the city. On that occasion, Paraguay’s Su- That night smugglers celebrated by preme Court denied an extradition launching fireworks on the riverside, request by Brazilian prosecutors who officials say. accused him of conspiracy, cigarette “Guaíra is practically abandoned,” smuggling and money laundering. says Saconato, who anticipates re- Just the mention of Silveira’s name cord cigarette seizures this year due in Paraguay’s tobacco circles raises to the global financial crisis and a re- eyebrows and causes interviewees to cent rise in cigarette taxes in Brazil. clear their throats repeatedly before

3Artcl i e 7 of 194 Show Contents 5Pg a e 13 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity offering a noncommittal “His name glers. “Good for them if they send the sounds familiar,” or “Didn’t he own a cigarettes to Brazil,” he says slapping cigarette factory around here?” his hands down on his desk. “If I have One man in Salto de Guairá, a too many requirements, I will starve.” Paraguayan city located just across Talavera boasts that his Latino ciga- the river from Guaíra, is not hesi- rettes have found a market as far away tant to talk about Silveira. Sidronio as Dubai. He says that wholesalers Talavera, a professional harpist who based in Panama buy from him and once played with one of Paraguay’s then ship the cigarettes overseas. “I most famous bolero bands, sits in a don’t know if from Panama they are small office from where he manages smuggled elsewhere or re-sold legally, his cigarette factory, Cosmopolita and I don’t care. I care that I sell.” S.A. The facility is rather old and As for Silveira, Talavera says he the cigarette-making machines are is still the trade’s big intermediary, housed in a warehouse across a dirt the middleman who acquires large yard from Talavera’s office. A truck quantities of cigarettes from the Par- was picking up cigarettes at the fac- aguayan factories and arranges the tory the afternoon ICIJ reporters deliveries in Brazil. “He works with visited in March. Talavera says he everybody!” he says when told that not only knows Silveira, he is also other cigarette makers seem oblivi- his business associate. “He is one of ous these days to Silveira’s where- the nicest people I have ever met,” abouts. “He is smart, the Mafioso. beams Talavera, who was convicted He fooled the Americans,” says Ta- last year of tax evasion. Paraguayan lavera. prosecutors accused Talavera of re- As things stand, the Paraguayan porting fake cigarette exports to government, which says it’s deter- Brazil in order to avoid paying taxes mined to bring the cigarette industry on imported cigarette manufacturing under compliance, has its work cut supplies. He has also been fingered out for it. Ortiz, Tabesa’s CEO, put it by Paraguayan officials as a counter- simply. “Paraguay is like a big duty feiter, a charge he denies. free store,” he said. “And it’s a great Talavera says he sells to anybody deal.” n who knocks on his factory’s door, and he’s well aware that some of the buy- Daniel Santoro contributed to this ers are smugglers or work with smug- report.

3Artcl i e 7 of 194 Show Contents 5Pg a e 14 of 146 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity When Cracking Down Seems Impossible P aRAGUAY’s Corruption Fuels a Criminal Economy By Marina Walker Guevara and Mabel Rehnfeldt Published Online | June 28, 2009

a raGUAy’s Customs chief, country that for decades has been Carlos Rios, knew he would get branded paraíso de contrabandistas Pa lot of heat from the tobacco — a smugglers’ paradise. Cigarette industry, but he decided to move for- seizures rarely occur in Paraguay, ward with the raid regardless. After where tobacco factories are owned all, he was part of a new administra- by the some of the country’s richest tion that had pledged to end the coun- and most influential. The country try’s deeply rooted smuggling culture. produces far more than the 3 billion So on February 6, 2009, Rios coor- cigarettes its residents consume; 68 dinated the largest cigarette bust in billion cigarettes were manufactured Paraguay’s history: 46 million “sticks,” in 2006, the bulk of which ended up stored in a shabby, illegal warehouse smuggled to neighboring countries located one block away from the bor- and beyond, according to law en- der with Brazil, in the desolate area forcement officials. After the Pindoty of Pindoty Porã. As officers burst Porã seizure, even President Fernan- onto the scene, seven cigarette-laden do Lugo — a former Catholic bishop trucks idled, preparing to cross into who in 2008 was elected on a reform Brazil. Police opened fire as one driv- platform — congratulated the cus- er revved his engine and sped across toms agents who took part in it. the border. The celebrations did not last long. It was an enforcement opera- As the press coverage faded, Rios qui- tion that wouldn’t raise eyebrows in etly replaced the core of the anti-con- most countries. But the raid proved traband unit that had conducted the an exceptional event in Paraguay, a cigarette raid, a section of Paraguay-

3Artcl i e 8 of 194 Show Contents 5Pg a e 1 of 46 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity an customs that receives financial as- Paraguayan side of the border. sistance from the U.S. government. The investigation remains open He scrambled to explain that the and customs may ultimately fine the agents had not effectively stopped wholesaler for attempted smuggling. the influx of contraband seeping into But the case illustrates the virtually Paraguay from neighboring countries. impossible task of cracking down on Meanwhile, a vociferous chorus of crime and contraband in a country prominent cigarette manufacturers where law often takes a back seat — whose smokes were caught in the to power and cash. Paraguay ranked seizure — worked behind the scenes, near the bottom — 138th among 180 enlisting influential politicians to lob- countries — of Transparency Interna- by for their products’ return. In May, tional’s 2007 Corruption Perception after a local wholesaler paid a bond Index. of almost $300,000, customs returned The tobacco industry in Paraguay all 46 million seized cigarettes. is virtually unregulated. Government agencies involved in its oversight cannot even seem to agree on the UNACCOUNTABLE INDUSTRY number of factories operating in the The raid had reaffirmed a precedent country. The minister of taxation, for an industry accustomed to mini- Gerónimo Bellasai, told ICIJ that tax mal accountability. “The seizure was evasion by tobacco factories is “very a media show,” said José Ortiz, CEO high,” but in March his team was still of Tabacalera del Este (Tabesa), the trying to figure out how to track com- top cigarette factory in Paraguay. pany sales. A basic step to improve Tabesa is reportedly owned by Hora- traceability, officials say, is to update cio Manuel Cartes, a high-powered the country’s arcane cigarette tax businessman whose holdings in- stamp system. Currently tax stamps clude a soccer club. The company’s — square pieces of white paper that cigarettes are routinely seized from are easily photocopied — are affixed smugglers in Argentina and Brazil, on master cases of 10,000 cigarettes according to customs officials in rather than on individual packs. But those countries. But the cigarettes in even this can be hard to accomplish. Pindoty Porã were legal, Ortiz said, “When there’s a lot of money on the as long as local cigarette taxes had other side, the tax authority always been paid and the sticks were on the loses,” Bellasai said.

3Artcl i e 8 of 194 Show Contents 5Pg a e 2 of 46 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity Back in customs headquarters customs officials refused to classify overlooking the Paraguay River, smuggling cases as a crime, opting Rios, the customs chief, spoke of his instead for the lesser category of daily “titanic fight” for resources to infraction. To Ovelar’s dismay, lo- run his agency. Paraguay operates cal judges often sided with customs only 10 check-points along more when he attempted to prosecute than 800 miles of border with Bra- smugglers. “Today cigarette [mak- zil, he said. And for customs agents ers] in Ciudad del Este have become who earn as little as $300 a month the pressure and money group,” the temptation to accept bribes is said the prosecutor. In contrast, he overwhelming. “We are defenseless,” added, traffickers of narcotics have he said. Rios has been criticized by never personally applied pressure to the media, however, for not using the him. resources he does have, including a fleet of speedboats donated last year NO LONE RANGERS by the United States, some of them reportedly kept for months at the Former prosecutor Eduardo Petta got manufacturer’s plant while smug- a taste of the politics behind cigarette gling soared. smuggling back in 2005, while pursu- In a country where the cigarette ing contraband cases in the southern industry carries such clout, those city of Encarnación. One morning he who actively pursue smugglers can saw suspects in a small plane prepar- find themselves out of a job. Pros- ing to take off from a municipal run- ecutor Eber Ovelar was suspended way. Acting without police backup in March from his post, and he said Petta drove his car across the airstrip he had no doubt the move was po- and blocked the airplane’s way. Inside litically motivated, linked to his anti- the plane, Petta reportedly found 8 contraband work. During his tenure, million contraband cigarettes. Lack- sentences for counterfeiting and ing equipment to search for drugs in contraband in Ciudad del Este — a the aircraft, he requested assistance commercial city at the heart of the from Argentine border agents, who notorious Tri-Border Area of Para- provided a drug-sniffing dog. Shortly guay, Argentina and Brazil — in- after the seizure, Petta was accused by creased six fold, Ovelar said. More his superiors of having violated Para- often than not, the prosecutor said, guay’s sovereignty by seeking help

3Artcl i e 8 of 194 Show Contents 5Pg a e 3 of 46 Tobacco Underground: Part One | South America ©2009 Center for Public Integrity from the Argentine officials, and he was removed from his post by a judicial review board. He later told reporters that he had no doubt the tobacco industry had urged his dismissal. “You can’t play lone ranger,” Petta told the Argentine newspaper La Nueva Provincia. Brazilian and Argentine customs and police officials José Ortiz, CEO of Tabacalera del Este. “We say they are frustrated by give them money,” he said of politicians Paraguay’s lack of com- during election time. “And all we ask is to be mitment to stop cigarette left alone.” Credit: Marina Walker Guevara smuggling. But they also acknowledge faults in their own govern- profits while denying any involvement ments’ enforcement. Trucks loaded in smuggling or counterfeiting (Bra- with Paraguayan cigarettes are sup- zilian law enforcement officials, how- posed to pass through several Bra- ever, link the Paraguayan factories di- zilian check-points along their more rectly to the illicit trade). Those who than 600-mile journey to Sao Paulo pursue civil charges against factory and other large cities. “There’s no owners face endless judicial battles. [political] will to combat this sort of British American Tobacco has repeat- crime,” said Érico Saconato, the head edly sued a tobacco company owned of the Brazilian federal police in the by former presidential candidate Os- border city of Guaíra, which in recent valdo Domínguez Dibb for counterfeit- years has become a major corridor for ing several of its brands. Some law- the smuggling of cigarettes from Par- suits have slogged though courtrooms aguay. “We know smuggling is one of for as long as 11 years. the sources for campaign financing in Tabesa’s CEO Ortiz was blunt when Brazil. So, there’s not much interest asked about Paraguay’s quid pro quo: in messing with it,” added Saconato. “We give them money,” he said of poli- Meanwhile, Paraguayan cigarette ticians during election time. “And all manufacturers are earning stunning we ask is to be left alone.” n

3Artcl i e 8 of 194 Show Contents 5Pg a e 4 of 46 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity Canada’s Boom In Smuggled Cigarettes IdianTbaccon o Factories, Organized Crime Control a Billion-Dollar Black Market By William Marsden Published Online | March 27, 2009

a ry Godelie has been a “I said, ‘Well no. I can’t sell you tobacco farmer most of his tobacco. I have to sell it to the legal Glife, struggling to keep alive system,’” Godelie recalled. “They a family farm that produces what kind of looked at me and laughed most everyone agrees is a death and like said, ‘Why would you want crop. Whacked by global competi- to do that when we’re offering you tion undercutting his prices, not to cash money, a deal here, you know.’ mention a dwindling number of Ca- ‘Well, no, I’m not going to do that nadian smokers, he often thinks of kind of stuff.’” getting out of the business. The two men drove off and Gode- Nothing brought this thought lie thought that was the end of it. home more clearly than a series of Then a few days later he had to events that began one hot July day fetch some irrigation equipment in 2006 when two men drove up to from a barn where he had stacked his southern Ontario farm and of- 169 bales that were over quota fered to buy his entire crop. That from last year’s tobacco crop. He surprised Godelie because anybody hoped to sell the surplus bales at in the tobacco business would know auction that winter as part of the that Canadian growers are part of current year’s quota. The first clue a tightly regulated quota system. that something was wrong came Buyers have to be federally licensed when he saw his hydraulic forklift and can buy only through the mar- sitting on the hood of his tractor. keting board. In his mind he blamed his son-in-

3Artcl i e 9 of 194 Show Contents 5Pg a e 1 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity law. But then he thought that that take chain saws and they cut the wasn’t typical, that his son-in-law side walls out of the barn,” said wouldn’t have done something like Linda Vandendriessche, chair of that. Then he switched on the light the Ontario Flue-Cured Tobacco and saw why he knew in his heart Growers’ Marketing Board and her- that something wasn’t right. self a tobacco farmer. “It’s no joke. “I stood there kind of flabber- You will not believe the intimidation gasted for a minute and then I that is going on with our farmers.” scanned over the stacks and then it hit me, oh, no, they had cleaned out A RUNAWAY BLACK MARKET the barn completely.” It had rained the previous night The thefts are the result of a new so Godelie hadn’t gone out to ir- brand of tobacco smuggling that rigate. That was the night they has flooded the Canadian market nailed him. He said he figured with contraband cigarettes and cig- that at 40 pounds a bale it took arillos made by clandestine manu- them maybe 20 minutes to clean facturers in Canada and the United him out. “They stole all 169 bales, States. Over the last six years, as which… is (about) 8,000 pounds. Ottawa and provincial governments It takes about 1.9 pounds to make began hiking tobacco taxes to curb 1,000 cigarettes. That’s more than smoking and raise funds, the smug- 4 million cigarettes. That’s pret- gling business has grown “exponen- ty significant. Now we’re talking tially,” according to the country’s some serious coin. For me it was national police force, the Royal Ca- about a C$20,000 loss” (or roughly nadian Mounted Police (RCMP). At US$18,000 at the time). a time when a crumbling economy It wasn’t long before Godelie be- has forced governments into deficit gan hearing about other tobacco financing, Canadian smugglers — farmers getting hit. The thefts be- dominated by members of Indian came so widespread that farmers tribes and in some cases their mob began installing security systems, partners — are pocketing hundreds barring barn windows, and parking of millions in profits. The cheap disabled tractors in front of their cigarettes not only fuel the spread barn doors. But to little effect. of smoking, which costs Canadians “Now they are so brazen they more than C$4 billion annually in

Canadian Indian reservations have become hot spots for illicit tobacco manufacturing, selling, and smuggling. Among the key sites: the Akwesasne, Kahnawake, and Kanesatake reserves near the U.S.-Canada border.

health care, but also rob govern- now contraband. According to the ments of money that otherwise most recent study, by Physicians for would go into official coffers to pay a Smoke Free Canada, contraband for healthcare and other services. in 2007 made up 27 per cent of the The federal, Quebec and Ontario Canadian tobacco market. In On- governments alone claim the pro- tario and Quebec the figure climbs liferation of untaxed cigarettes is as high as four out of ten. This con- costing them at least C$1.6 billion forms with an earlier study done by a year the nation’s health ministry, Health The size of this tobacco-fueled Canada. “We’re making more ciga- black market is huge. Both industry rettes than Imperial Tobacco [Can- and government studies indicate ada’s leading tobacco company],” that, across Canada, two to three boasted one Indian smuggler. cigarettes out of every ten sold are All those contraband cigarettes

3Artcl i e 9 of 194 Show Contents 5Pg a e 3 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity are fueling a black market conser- tigative Journalists has found that vatively estimated at C$1.3 billion, outlaw bikers, Italian, Irish, Rus- with profit margins rivaling those of sian, and Asian mobs are also now narcotics. And the market is grow- involved in the manufacturing, dis- ing rapidly. Seizures of contraband tribution, and retailing of the illicit tobacco in Canada jumped a whop- tobacco products. According to In- ping 16-fold between 2001 and dian smugglers and police, in some 2006, according to the RCMP. The cases the capital to buy the equip- off-the-books smokes range from ment and set up operations was independently-produced cigarettes fronted by organized crime. sold in plastic bags to expertly Recent joint U.S.-Canadian po- counterfeited packs of leading lice investigations indicate that brands. In some cases cheap Indi- drug money has been used to fi- an brands have become so popular nance the tobacco business. Tobac- that rival Indian manufacturers are co profits are likewise used to buy counterfeiting them. cocaine and marijuana, which are So vast are the profits, and so smuggled across the border using poorly are the laws enforced, that the same networks as for tobacco. the contraband tobacco industry Large cash seizures are common has attracted an unholy alliance of at the border and along Highway Canadian Indians — who say they 401 in Ontario, which has become a have the right to sell untaxed ciga- smugglers’ pipeline to Montreal and rettes — and members of various Toronto. organized crime gangs, according In March 2008, federal, provin- to law enforcement officials and cial, and Mohawk police in three re- the smugglers themselves. At the serves — Akwesasne, Kahnawake, center of the trade are about 20 and Kanesatake — seized about Indian-owned manufacturers that C$2 million in cash after raiding produce millions of untaxed and a cigarette/marijuana smuggling unregulated cigarettes a day out of operation. In just two seizures on small and medium-sized factories Nov. 17 and Dec. 7 last year, Cana- at Indian reserves in Ontario, Que- dian Border Services agents seized bec, and across the border in New C$636,467 in U.S. and Canadian York State. An investigation by the funds hidden in vehicles driven by International Consortium of Inves- Indians from Akwesasne, the re-

3Artcl i e 9 of 194 Show Contents 5Pg a e 4 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity serve that straddles the border be- name used. Imperial Tobacco ad- tween Ontario, Quebec, and New mitted that it sold surplus machines York. In addition, the RCMP on Feb. to the Mohawks, but claimed the 19 seized US$260,000 from an Indi- company later got them back. Only an driving from Akwesasne to Que- licensed companies can operate to- bec. Police believe that the cash is bacco machines in Canada. linked to drug sales into the United Some producers operate in clan- States. destine warehouses and garages or makeshift shacks located along the back roads in Indian communities. MADE IN CANADA Others are sophisticated plants While Canadian officials have com- sporting reconditioned British- plained to their U.S. counterparts made cigarette machines known as that most of the illegal cigarettes Mark-9s, each capable of producing are produced on the U.S. side of 3,500 to 5,000 cigarettes a minute. the Akwesasne reserve, the Center The illicit operations have in for Public Integrity has found that some communities become impor- this is no longer true. According to tant local employers for both Indi- Indian sources and visits to manu- ans and non-Indians alike. Workers facturing plants by the Center, the daily earn C$100 and C$150 cash operations have shifted to Canadian for bagging cigarettes and C$175 reserves in Quebec and Ontario. to C$200 a day for working the ma- Ironically, it was a major tobacco chines, several workers said. company, Imperial Tobacco, that In the Mohawk community of supplied Kahnawake with the re- Kahnawake, which has a population serve’s first cigarette making ma- of about 8,000 and is located just chines when the British American south of Montreal, Chief Rhonda Tobacco subsidiary sold off surplus Kirby, who is responsible for the machines at its Montreal plant in Mohawk reserve’s tobacco indus- 2003 and moved its operations to try, estimated that the business Mexico. “They not only supplied employs more than 2,000 people in the machines, but they came on the manufacturing, distribution, whole- reserve and showed us how to work sale, and retail. Many of the work- them and blend the tobacco,” said ers are non-Indian. one smuggler who didn’t want his “We have so many non-native

3Artcl i e 9 of 194 Show Contents 5Pg a e 5 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity community members working here and guns, as well as the establish- and then of course relationships ment of internet gambling services, start up, so now that’s another casinos and bingo halls, have all be- problem,” she said. come contentious issues not only Both Kahnawake and Akwesasne between Indian and non-Indian are traditional Mohawk communi- communities but also within the ties that bar non-Indians from liv- Indian communities themselves. ing among them and jealously guard Tobacco, however, is different. The what they consider their ancient Mohawks believe their right to trade right as a sovereign people to freely this legal substance is sacrosanct. cross borders, trade with whomever What’s more, it brings wealth to they want, and not collect or pay otherwise poor communities. “The taxes. government’s upset because we are A long history of racism against punching out millions of cigarettes Canadian Indians — or First Na- a day, and of course he wants his tions peoples — has also played a piece of the pie,” said one contra- role in hardening Mohawk attitudes band seller. “If they come in, we’ll and creating a climate of distrust. close the bridge again.” Kahnawake in particular has been Four centuries after Europeans quick to react when it believes took control of the Indian tobacco Canada has violated these sover- trade, the First Nations are taking eign rights. The Mohawks have it back. retaliated by blocking highways through their community as well THE GANGS MOVE IN as the Mercier Bridge, one of the main links between the island of In the early 1990s, when tobacco Montreal and the mainland. Police smuggling on Indian reserves was generally won’t enter the Mohawk at record levels, the product came reserves without permission from from the major manufacturers such the tribal council. To a degree, this as Imperial Tobacco, which is owned has encouraged organized criminals by British American Tobacco; RJR to use the reserves as a safe haven MacDonald, which at the time was and a trans-border pipeline, say law owned by RJ Reynolds and is now enforcement officials. owned by Japan Tobacco; and Roth- The smuggling of drugs, aliens, mans, Benson & Hedges. The RCMP

3Artcl i e 9 of 194 Show Contents 5Pg a e 6 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity effectively shut down that pipeline and, sometimes, weapons come by charging RJR and its executives north. The fact that goods can pass with aiding and abetting smuggling. from the Mohawk community of Rothmans and Imperial paid C$1.15 St. Regis on the U.S. side to Ak- billion (US$1.12 billion) in fines and wesasne on the Canadian side and penalties to Canadian governments then enter non-Indian communities last year for their part in the early unchecked is a major problem for 1990s smuggling. RJR and some authorities. When the St. Lawrence of its executives still face criminal River ices over, smugglers take a charges. winter road between the two com- With the major players out of the munities. When the ice melts, the contraband game, the Indians have speedboats come out. In one Feb- moved in and created a fully inte- ruary case, U.S. authorities arrest- grated business. The only part they ed 10 people, alleging they were don’t control is tobacco farming. part of a ring that smuggled 50,000 The success of Indian cigarettes, pounds of marijuana through Ak- says tobacco farmer Godelie, re- wesasne and into the United States flects a sea change in market dy- from 2003 to January of this year. namics brought on by high taxes, One of the ringleaders has a tobac- which now make up about 75 per- co manufacturing license from the cent of the cost of a legal cigarette. Canadian government. “That really started to send a In a 2008 report on tobacco en- message to everyone in the world forcement strategy, the RCMP of tobacco that the consumer in found that the “current trend of Canada went from taste-sensitive manufacturing, distributing and to price-sensitive,” he said. selling contraband tobacco prod- But as Godelie learned three ucts, which has exponentially devel- years ago, the tobacco business can oped over the last 5 years, involves be organized crime at a worrisome, organized crime networks exploit- reckless level. At the heart of it all ing Aboriginal communities.” The is the 12-mile stretch of the U.S.- RCMP claims there are “approxi- Canada border that runs through mately 105 organized crime groups Akwesasne. It is a major security of varying levels of sophistication” soft spot with marijuana and co- involved in tobacco smuggling. The caine flowing south while tobacco agency defines organized crime as

3Artcl i e 9 of 194 Show Contents 5Pg a e 7 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity three or more people conspiring to who calls himself Splicer, agrees commit a serious criminal offense with the RCMP that the mob has for financial or material benefit. infiltrated the illicit tobacco busi- Indian leaders have taken ex- ness. “I agree with them 100 perception to the allegation, claiming cent that, yes, there is mafia in that it implies that their commu- our community,” said Splicer, who nity members are all criminals. Yet has moved contraband tobacco for Mohawks involved in the tobacco 20 years. Organized crime, he ex- business told the Center said that plained, finances manufacturing organized crime plays a major role plants and many of the retail smoke in the contraband tobacco. “Every- shops, most of which are little more body knows we do have organized than plywood shacks or converted crime here,” said Chief Kirby. In shipping containers. fact, some smoke shop owners want to get out of the business, she CONTRABAND BAGGIES added, but have been forced by the gangs to stay put. “The mob is in- More than 150 Indian smoke shops volved with some of the individuals crowd the nine-kilometer strip of — the Mafia and the Irish mob and Highway 138 that runs through the the Russian mob and the Chinese heart of the Kahnawake reserve. mob.” With names like Mega Butts, Get The Hells Angels have financed ’n’ Go, and Another Dam Cigarette several manufacturing operations Store, they serve the relentless flow in Kahnawake, Indian sources told of commuters between Montreal the Center. This month, the RCMP and its southern suburbs. They ended a year-long investigation in sell predominantly re-sealable bags Quebec with the arrest of 22 peo- of no-name cigarettes and Indian ple, including two Hells Angels and brands such as Native, Montcalm, two Mohawks from Kahnawake. Broncos, and DK’s, most of which, They are charged with conspiracy Splicer said, are made on the re- and trafficking in contraband ciga- serve. rettes and drugs, including cocaine, The price of a carton of legal cig- ecstasy, marijuana, and metham- arettes in Canada varies between phetamine. C$60 and C$80, depending on the One prominent tobacco seller, province. Indian-made brands cost

3Artcl i e 9 of 194 Show Contents 5Pg a e 8 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity from C$12 to C$35, and no-name to community youth programs and brands, which come in re-sealable health services. bags, sell for as low as C$8 for 200 The company’s cigarettes line the cigarettes. (Competition in Kahn- shelves of Canadian smoke shops awake grew so intense last year that and are considered contraband by baggy prices sank to C$6 before the the Canadian government. Jacobs Kahnawake Tobacco Association Tobacco is owned by CEO Rosalie imposed price controls with a C$10 Jacobs and her family, according to minimum. Still, the Center found an affidavit she filed in a U.S. feder- some retailers selling for C$8.) al court. Her son Al Jacobs, known In addition to Kahnawake, police on the reserve as the “40-million- claim about 11 Indian manufactur- dollar man” and a veteran tobacco ers are operating on the Canadian smuggler with convictions dating and U.S. side of the border at Ak- back to 1994, was indicted July 17, wesasne. The Center tried to track 2008, with five other men for the down these operations but could robbery and murder of a marijuana locate only two that were still in dealer in Stockholm, New York. Ja- operation. Officials say there are cobs is in prison awaiting trial. His also manufacturers on the Six Na- mother’s business, which has ad- tions Reserve near Brantford in dresses in both Pennsylvania and southwestern Ontario and the Ty- Akwesasne, still operates out of a endinaga reserve near Belleville, new 47,000 square foot factory em- Ontario. ploying 72 Indians full time with a Many of the tobacco manufac- payroll of US$2 million, according turers have their own websites on to an affidavit signed by Rosalie Ja- which they advertise their products cobs in U.S. federal court. and where they can be purchased. Jacobs Tobacco in 2007 opened Jacobstobacco.com, the website an account at the Bank of Montreal for the Jacobs Tobacco Company on the Canadian side of the reserve. on the U.S. side of Akwesasne, for It is the only bank on either the Ca- example, boasts of a “state of the nadian or U.S. side of the reserve. In art facility” producing three “pre- an affidavit, Jacobs said she opened mium brands” under the name of the account to wire payments to “dis COUNT.” The website states her U.S. wholesale tobacco suppli- that the company regularly donates ers. On August 20, 2007, for ex-

3Artcl i e 9 of 194 Show Contents 5Pg a e 9 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity ample, she declared US$15,000 to one with U.S. authorities. It does, border authorities and was allowed however, have a license from the to take the cash into Canada where St. Regis Mohawk Tribe. The tribal she deposited it at the Bank of Mon- license is not recognized by Cana- treal. Three days later, she tried to dian or U.S. authorities. take US$64,000 across the border into Canada. This time, however, “A BIG, COMPLEX, when she declared the money to a NASTY ISSUE” U.S. border guard, he seized it and gave it to the Bureau of Alcohol, Meanwhile, business on the Kahn- Tobacco, Firearms, and Explosives awake reserve is growing so fast (ATF), which initiated a seizure that the community now appears to proceeding. have surpassed its cousins in Akwe- Jacobs sued the U.S. government sasne. The Center found that Kahn- to get the money back, claiming awake has at least nine manufactur- that it was legally acquired from to- ers. One worker, who didn’t want bacco manufacturing and that she his name used, said production var- had at all times complied with U.S. ies but overall his shop processes law. The ATF, in turn, argued that about 5,000 pounds of tobacco each Jacobs Tobacco’s operations were day using two Mark-9 machines — illegal because the company had no enough to make about 2.5 million license. The case was settled last cigarettes, or 125,000 packs worth. year when Jacobs agreed, without Until recently the raw tobacco admitting or denying guilt, to for- has been smuggled up through Ak- feit half the money — US$32,000 — wesasne from North Carolina. But while the ATF agreed to return the with the emergence of Kahnawake other half. as a force in cigarette production, Rosalie Jacobs continues to de- Splicer, the veteran tobacco deal- posit cash at the Bank of Montreal, er, said a lot of tobacco is coming according to police, and declares through the Port of Montreal and her funds to both U.S. and Cana- the St. Lawrence Seaway, which dian officials. Her company does goes right through Kahnawake. “We not have a Canadian or U.S. license have all kinds of ways of getting to- to manufacture and sell tobacco, bacco here,” Splicer explained. “We although it says it has applied for have the borders beat. We have cus-

3Artcl i e 9 of 194 Show Contents 5Pg a e 10 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity toms beat. The international waters Jacobs Tobacco and Native Trading go right through our community… Associates. Take a ride up the riverfront and Native Trading’s brands crowd take a look, and you’ll figure out the shelves of smoke shops in re- how we get it in. We built our own serves in Ontario and Quebec. Its docks. We can load and unload.” owner, Susan Jesmer of Cornwall, Just a few years ago, Indians Ontario, has a U.S. license to manu- hired companies in North Carolina facture her Native brand cigarettes. such as the Timcorp Group of Char- Through her Washington, D.C., law- lotte to supply turnkey cigarette yer Bill McGowan, Jesmer refused manufacturing plants, plus raw to- an interview. “It’s a very sensitive bacco, filters and tips, say police. subject. It’s a big, complex, nasty The company’s website now says issue,” McGowan said in trying to that it is out of business. A call to explain why he didn’t want his cli- the firm, however, found it still op- ent to talk to the media. “The whole erating. A receptionist said com- issues of Canada, etc., etc. … She pany President Dennis Makepeace just wants to follow the rules and would not reply to questions about not everybody is doing that.” his business with the Indians. Indian tobacco is mainly a cash On March 14, 2006, St. Regis business. During a reporter’s visit to tribal police on the U.S. side of the the offices of Native Trading in St. Akwesasne reserve stopped three Regis, several people came in, were Bulgarian nationals in a vehicle handed large wads of bills, and then owned by a prominent Akwesasne quickly left. On February 19, 2006, company, Mitchell Construction. St. Regis police stopped one South According to the RCMP, one Bul- Carolina tobacco dealer and found garian named Stoyan Ivanov Dar- a shoebox filled with US$70,000 in zhonov, 34, told police they worked his car. According to the RCMP, the for Timcorp and had come to St. man said he got the money from Regis to set up cigarette machines Patrick Johnson, who is part owner in a warehouse behind Mitchell of MHP Manufacturing, a St. Regis Construction. Darzhonov also told cigarette manufacturing company. police that two months earlier they Johnson’s partner in the business is had set up manufacturing opera- William Hank Cook. tions for three companies, including Later that year, on November

3Artcl i e 9 of 194 Show Contents 5Pg a e 11 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity 20, a joint police task force ar- seizures in the region of Akwe- rested Johnson and Cook for to- sasne and Valleyfield, just west of bacco and drug smuggling. Police Montreal, netting 443 vehicles plus claim they used profits from con- a number of firearms that include traband cigarettes to buy Canadi- two AK-47 assault rifles, two M-16 an-grown marijuana, which they machine guns and three grenade smuggled into the United States. launchers. The drug profits were then laun- In theory, penalties for smuggling dered through MHP Manufacturing, tobacco in Canada can be quite se- police claimed. Cook pleaded guilty vere. Federal fines range between to charges related to drug traffick- 17 cents per cigarette and 25.5 ing and money laundering and was cents, which adds up when you’ve fined C$280,000. Johnson pleaded got thousands of cigarettes jammed guilty to one smuggling charge and into a van. Added to that are pro- money laundering. He was fined vincial penalties that can double C$350,000. the fines. Failure to pay means up to 18 months in jail. Trouble is, prosecutors say, A FAILURE OF ENFORCEMENT smugglers often don’t bother to The RCMP strategy for combat- show up in court, which means po- ing cigarette smuggling is to target lice have to go looking for them. the ringleaders — those primarily And when the smugglers eventu- responsible for manufacturing and ally do come to court and receive distribution. At the same time po- stiff fines of tens of thousands of lice have tried to disrupt the flow dollars, they don’t pay them. “In of contraband by arresting couri- my four years doing these cases I ers. So far, even officials admit this have never seen anybody incarcer- strategy hasn’t worked. ated for failure to pay a fine,” Corn- Tribal councils won’t shut down wall public prosecutor Ron Turgeon manufacturers because they don’t said, adding that nobody pays the regard them as illegal. Some have fines. “Now I’m asking for prison for been shut down but only because a second offense, but I’m still not their owners have also been ar- getting it.” rested for drug smuggling. Since The province of Ontario funnels 2007, there have been 480 tobacco all the Akwesasne cases through a

3Artcl i e 9 of 194 Show Contents 5Pg a e 12 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity small courthouse that sits behind a zures have declined because police beer store in the rural town of Alex- are reluctant to chase smugglers, andria, which is about half an hour Sergeant Harvey said. from Cornwall. The Center tried to follow one person accused of BIG PROFITS, BIG DEMAND smuggling, Oren Bigtree, through the court system, but he never The weak enforcement, willing sup- showed up. “They get fined hun- pliers, and big demand suggest how dreds of thousands of dollars and hard it will be to change what has nobody actually pays that money,” become a billion-dollar black mar- said Sergeant Michael Harvey of the ket. Worse, with penalties and pun- Cornwall detachment of the RCMP. ishment modest at best, and profits “They pay maybe $100 a month. It’s rivaling those of narcotics, the big- just crazy. We seize loads every day gest challenge may simply be the but there are 13 factories pump- huge profits to be made. Individual ing out millions of cigarettes so it smugglers, or runners, can cash in doesn’t make any dent.” big. One 17-year-old runner testi- Chasing smugglers is a danger- fied at her bail hearing that she ous occupation. Last month a smug- made three trips a day, six days a gler from Akwesasne tried to run week, and earned about C$6,000 a over a Quebec police officer with week. She said she used the money his truck. The officer shot out a to finance her cocaine habit. tire, arrested the man, and found an Retailers also can make a good liv- AK-47 in his cab. In November, an ing. Splicer said his retail operation elderly couple from Massena, New clears about C$130,000 a year sell- York, was killed when a tobacco ing contraband. Still, it’s not easy, smuggler, chased by two Mohawk he says. Splicer complains that he police officers, rammed their car. can’t hold any assets in his name or The smuggler also died in the col- the government will seize them. He lision that engulfed both vehicles in has no bank account and is forced to flames. In February, the police of- keep large amounts of money handy ficers were charged with criminal to pay his workers and suppliers in negligence causing death and with cash. “I can’t put my name up front dangerous driving. because the government is going to Since the accident, tobacco sei- come kicking my door in. That car

3Artcl i e 9 of 194 Show Contents 5Pg a e 13 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity I own out there? It belongs to my “I have been in this business since last girl friend. I pay for the car pay- I was 16 years old,” Splicer said, tak- ments but I can’t own it in my name. ing a drag from a premium brand And my business is not in my name. cigarette. “When they rolled the first I burn all my stuff. We don’t keep re- cigarettes into this community I was cords in the stores. We burn paper. there on the water smuggling them At the end of the day I log into a spe- in. I was armed with a machine gun cial computer and hide it on a chip. in the bush to protect our loads. I … The house I live in is not in my remember all this. I ran the river. I name. That’s how I live. I’m nobody.” did all that. Because this is what I do. But he’s someone to the Quebec This is who I am.” n government. Tax collectors have assessed CORRECTION: The original ver- Splicer for an impressive C$25 mil- sion of this article reported that lion in unpaid taxes dating back to the company Brand-U Media is the early 1990s, when he ran mil- a tobacco manufacturer. Cana- lions of cartons of cigarettes into dian government records, how- Kahnawake. Splicer said he reached ever, indicate that its activities a settlement agreeing to pay the involve publishing and combat government a mere C$150 a month sports. The Center also reported against the debt. “They told me to that Burton Rice is president of sign an agreement to pay or go to Mustang Distribution Ltd. Gov- jail for two years,” he said. “I pay.” ernment records indicate that It’s hard to believe that will make its president is his father, Peter much of a dent in what has become Rice. Burton Rice is not listed as a booming business. Throughout an officer or shareholder of the the conversation with Splicer, there company. The errors arose out is a constant flow of customers in of a misreading of the corporate and out of his smoke shop. They documents. The article published buy mostly the low-end discounted in this newsbook and posted on cigarettes that come in re-sealable the Center’s website has been re- bags. Twice during the afternoon, vised accordingly. suppliers brought in fresh boxes each containing 50 cartons, or 10,000 cigarettes.

3Artcl i e 9 of 194 Show Contents 5Pg a e 14 of 146 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity B ig Tobacco’s New York Black Market HwAericao m ’s Top Cigarette Firms Fueled a Billion-Dollar Underground Trade By Marina Walker Guevara and Kate Willson Published Online | December 19, 2008

o r New York Governor bing the state and New York City of David Paterson, there was nearly $1 billion in tax revenue. Fno good option. Faced with a Ironically, this illicit trade has crushing state deficit, angry Ameri- been protected in part by the can Indians, and uncooperative state’s own reluctance to enforce tobacco companies, Paterson on cigarette tax collection on reserva- December 15 signed into law a bill tions, a policy known as forbear- designed to take on one of Amer- ance. Indians protested violently at ica’s most lucrative black markets: the state’s last attempt at collect- the underground trade in cigarettes ing the tax in 1997, briefly shutting flowing through the state’s 10 In- down the New York State Thruway. dian reservations. Since then, New York governors New York’s 70-year-old tobacco have vowed to end the black mar- black market exploded after 2002, ket, but ultimately have shied away as cigarette tax hikes encouraged from enforcing cigarette tax laws smuggling from out of state and on reservation sales. through reservations. The traf- It remains unclear whether Pat- fic is part of a nationwide boom in erson will be any different from his smuggled cigarettes, but the trade predecessors. If implemented, the has reached a peak in New York. In new law will require manufacturers 2007, one in three cigarettes sold in to supply only wholesalers that can New York was channeled untaxed certify that cigarettes won’t be re- through Indian smoke shops, rob- sold tax-free to reservations.

Kilometers Black Market Cigarettes 0 50 50 Indian reservations are the major source of untaxed cigarettes for Miles New York’s booming tobacco black market, robbing the state of nearly $1 billion annually in tax revenue. More than 6 billion untaxed cigarettes flowed through New York’s 10 reservations in 2007. If smoke shop owners sold VERMONT only to members of their own tribes, as provided Mohawk by law, every reservation resident — man, woman and child — would have to smoke 44 cigarettes per hour. N.H. C A N A D A N e w Y O R K Lake Ontario O neida Tuscarora Onondaga Tonawanda MASS.

Lake Cattaraugus Erie SENECA Oil Springs CONN. Allegany P Enn. Sources: New York State Department of Taxation and Shinnecock Finance, U.S. Census Bureau, U.S. Bureau of Indian Affairs Graphic by Stephen Rountree N.J. Poospatuck Cigarettes Cigarettes per Reservation Population purchased 2007 resident per hour Mohawk 2,699 133,062,200 6 Oneida 650 528,570,200 93 Onondaga 1,473 157,886,800 12 Poospatuck 283 2,263,354,600 913 Shinnecock 504 66,063,200 15 Tonawanda 543 400,075,200 84 Tuscarora 1,138 327,150,200 33 SENECA: Oil Springs, Allegany 9,227 2,511,910,800 31 and Cattaraugus combined

3Artcl i e 10 of 194 Show Contents 5Pg a e 2 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity The stakes are high. The law olds — have flooded New York In- moves enforcement up the supply dian reservations with their untaxed chain to the wholesale and manufac- cigarettes, despite ample evidence turing level, charging tobacco com- that those sales fueled a billion-dollar panies with ensuring that their prod- black market, an investigation by the ucts are not smuggled. “This means International Consortium of Investi- cutting off cigarettes at the factory gative Journalists (ICIJ) has found. door,” said Russell Sciandra, direc- A three-month inquiry by ICIJ tor of the Center for a Tobacco Free lays bare the role played by leading New York. tobacco companies and their direct That may not be easy to do. Within distributors as suppliers of the bulk hours of the bill’s enactment, Philip of cigarettes sold untaxed on reserva- Morris USA, maker of Marlboro, crit- tions. The investigation relied on in- icized the legislation. “We applaud ternal company sales data, tax filings the government in trying to move by cigarette wholesalers, and court forward with something … [but] we documents, as well as interviews with are not sure that is going to lead to law enforcement officials, cigarette tax collection,” said Joe Murillo, a wholesalers, and smugglers. Philip Morris counsel. Among the Consider these findings: challenges Murillo cited: the state’s forbearance policy as well as current • As New York state struggled with a and possible litigation by wholesal- massive fiscal crisis in 2007, Loril- ers and Native Americans. lard, Philip Morris, and R.J. Reyn- And then there’s the role of the big olds funneled 4.3 billion tax-free tobacco companies themselves, who cigarettes to smoke shops on New in the past have shown a marked re- York Indian reservations — more luctance to ensure their products are than 25 percent of the companies’ not smuggled. “Cigarette manufac- combined total sales in the state. turers should not be expected to po- • Although 43 manufacturers sup- lice the trade in untaxed cigarettes,” plied reservations in New York last Lorillard, a leading tobacco firm, said year, two-thirds of those cigarettes in a December 9 statement. came from Lorillard, Philip Morris, In fact, for years, America’s three and R.J. Reynolds, an analysis of largest tobacco companies — Loril- tax data by ICIJ shows. Lorillard, lard, Philip Morris, and R.J. Reyn- maker of the popular Newport

3Artcl i e 10 of 194 Show Contents 5Pg a e 3 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity brand, sold 40 percent of its ciga- and Indian vendors for their role in the rettes in New York through res- illicit cigarette trade. So brazen are ervations — more than any other they, Proshansky added, that two New manufacturer. York smugglers are even suing each • To distribute through the reser- other in court over their illegal profits. vations, tobacco companies have relied on a handful of wholesal- BILLION-DOLLAR BLACK ers who ship billions of untaxed MARKET cigarettes to Indian stores. One in three cigarettes sold in New York Experts say the size of New York’s last year was channeled, untaxed, cigarette black market is exceeded through these wholesalers, who only by the region’s traffic in narcot- are being sued by New York City ics. And within the nation’s illicit ciga- for complicity in cigarette smug- rette trade, New York likely ranks at gling. the top, rivaled only by states such as California and Michigan. • Bootleggers and online vendors Patrick Fleenor, who has studied working with the reservations the evolution of this underground have netted, conservatively, an economy as chief economist at the average of $500 million annually Tax Foundation, a nonpartisan tax since 2000, according to ICIJ’s research group, said New York’s analysis. black market dates back to the city’s The cost of this trade is consid- first cigarette tax of one cent, in erable: In 2007, New York state and 1938. While in the 1960s and ’70s New York City lost more than $850 cigarette bootlegging in New York million in cigarette tax revenue, ac- was controlled by a handful of or- cording to an analysis by ICIJ. That ganized crime groups, including the money would have cut the state’s Mafia, today the trade is much more 2008 fiscal deficit by half. fragmented, with groups including “The cigarette black market in New Dominican tax-stamp counterfeiters, York is enormous, and it’s brazen, and African-American smugglers, and it’s carried out right under the nose of Middle Eastern vendors from Jordan the government,” said Eric Proshan- and Yemen competing for the profits. sky, an attorney for New York City who “The potential for volatility is much has filed lawsuits against wholesalers greater,” Fleenor said.

3Artcl i e 10 of 194 Show Contents 5Pg a e 4 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity The incentive to smuggle is say reservations are sovereign ter- strong. New York has the highest ritories, and centuries-old treaties cigarette taxes in the nation, cash- prevent interference from the U.S. ing in at $4.90 per pack when state government. “Tribes never really and city excise and sales taxes are have been a part of the legal or po- factored in. For smugglers this litical system,” said G. William Rice, means they can buy a pack of un- professor at University of Tulsa taxed cigarettes on the reservations College of Law and co-director of for $3, sell it for twice as much in a the Native American Law Center. Bronx “bodega” — a mom-and-pop “We have a treaty that says this is convenience store — and still beat our house; what we do here should the price of a 7-Eleven store in Man- be our business; It’s no different hattan. than Monaco being surrounded by “This is the “This is the France.” Rice said, however, that new crack,” new crack,” Indian nations have no choice but says a former says a former in the end to comply with U.S. law. smuggler. “The smuggler. “The “When a bigger sovereign tells a money is easy, smaller sovereign, ‘We’re going to money is easy, the charges are do something,’ what choice do we the charges less.” have?” are less.” The problem Some states are entering into is not exclusive agreements with the tribes that pro- to New York. Officials across the vide for either the collection of tax- country are wrestling with cigarette es or establish quotas for cigarette smuggling from Indian reservations, shipments. Arizona, with the high- as they try to strike a balance be- est cigarette tax rate in the South- tween law enforcement and tribal west, is trying to curb smuggling sovereignty. The U.S. Supreme from the nation’s largest Indian res- Court ruled in 1994 that although ervation, Navajo, as well as counter- American Indians are allowed to sell feit cigarette flows from Mexico and untaxed cigarettes to members of smuggling from lower-tax states. their own tribe, states have a right Washington state estimates it has to collect taxes on sales to non-In- lost at least $161 million to cigarette dians. tax evasion in 2008 even as it tries Native American legal advocates to stem the tide by signing contracts

3Artcl i e 10 of 194 Show Contents 5Pg a e 5 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity with the state’s 29 tribes. Oddly night in jail and then you go through enough, officials there estimate that the system.” most cigarette tax evasion by local smokers comes not from Washing- BIG TOBACCO’S SUPPLY CHAIN ton state sales, but through Internet purchases from Seneca reservations A group of seven cigarette wholesal- in western New York. ers, all but one in New York state, is The sparsely populated New York responsible for supplying more than reservations, in particular, have em- 90 percent of all cigarettes sold on braced the tobacco trade. With fewer Indian land, according to wholesal- than 17,000 residents, the state’s res- ers’ tax filings. They buy directly ervations cannot possibly absorb the from the manufacturers and receive huge numbers of Marlboros, Camels, bonuses for providing the compa- and Newports, among other brands, nies detailed sales information. Last shipped to smoke shops in their ter- spring, one longtime Philip Morris di- ritories — 6.4 billion in 2007. Each rect distributor was caught allegedly resident — from newborn to nonage- diverting Marlboros to a notorious narian — on New York’s 10 reserva- smoke shop owner on the Long Island tions would have had to smoke 1,060 Poospatuck reservation. At about cigarettes per day to consume what the same time, another distributor their smoke shops purchased. The allegedly sold millions of cigarettes bulk end up sold over the Internet or to seemingly fictitious smoke shops, bootlegged — largely by minivan — also on the Poospatuck, whose listed to New York City for sale, tax free, in addresses were nothing more than bodegas and on the streets. A low- light posts, trees, and dumpsters. level smuggler can walk away with Philip Morris terminated its up to $7,000 a day. relationship with both wholesal- “This is the new crack,” boasted ers, but critics say the big tobacco a young former New York smug- companies have shown little inter- gler who asked his name not be est in ensuring their cigarettes are used because he is now collaborat- not smuggled. An April 2008 report ing with law enforcement. “It’s bet- on New York’s cigarette black mar- ter than crack. The money is easy, ket by the Republican staff of the the charges are less. Crack, you do House Committee on Homeland Se- years. Cigarettes, you spend the curity noted that the tobacco indus-

3Artcl i e 10 of 194 Show Contents 5Pg a e 6 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity try lacks much incentive to prevent In the 1990s, leading American smuggling, as the illicit trade boosts and British tobacco companies were the companies’ bottom line. “That at the core of the cigarette smuggling would explain why manufacturers business. An investigation by ICIJ and distributors continue to flood in 2000 revealed how Philip Morris, New York’s Native American Indian R.J. Reynolds, and British American reservations,” the report said. Tobacco colluded with criminal net- “Lorillard is not in a position to works to smuggle cigarettes world- know where, or to whom, the prod- wide in an effort to increase market uct will be resold,” the company share. In North America, manufac- responded in a statement to ICIJ. turers used the Akwesasne Indian Stopping smugglers, Lorillard said, reservation, which straddles the U.S.- “is the responsibility of the state and Canada border, to smuggle millions of law enforcement.” The companies cigarettes into the high-taxed Cana- also claim that since the state hasn’t dian market. enforced tax collection on reserva- Today, some companies have tions, they risk being sued if they cut seemingly retreated from an active wholesalers unilaterally role in cigarette smuggling, but the Philip Morris officials, who get situation remains murky in duty-free higher marks from law enforcement shops and other untaxed venues. for cracking down on the illicit trade, New York officials say they have claim they are doing their best. “We been reluctant to take on the tobac- monitor our contracts [with whole- co companies directly for their role salers], we enforce our contracts, we in supplying the reservations be- bring litigation when appropriate and cause of the industry’s ability to put we have ample cooperation with law up an extended legal battle. Instead, enforcement particularly on this New they are going after the middlemen York situation,” said Murillo, the Phil- in hopes manufacturers will feel ip Morris counsel. pressure to reform. R.J. Reynolds, whose brands include Camel and Doral, plans only STOCKING THE RESERVATION limited action. Starting December 28, the company will cut off discounts to Every shop is a smoke shop on the retailers who sell untaxed cigarettes, Seneca Nation’s 34-square mile Catta- according to a spokeswoman. raugus reservation, bordered on one

3Artcl i e 10 of 194 Show Contents 5Pg a e 7 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity side by Lake Erie, and three sides by “R.J. Reynolds, Lorillard, and hardwood forest and farms laden in Philip Morris come in monthly and summer with concord grapes, toma- change signs, check that no product toes, and sweet corn. is out of date, that kind of thing,” Doogie’s Smoke Shop is painted said Doogie’s owner Sally Snow, who bright green, boasting two lonely- heads an organization comprised looking gas pumps amid a clutter of of the Seneca Nation’s 234 smoke signs announcing sales of Newports, shops, gas stations, and mail-order Marlboros, and Kools. Smoke shop cigarette outlets. operators say tobacco company sales A carton of Marlboros or Newports representatives visit reservation ven- was selling for $32 at Doogie’s this fall dors like Doogie’s monthly to check — a deep discount from the $60 price supply and product placement, up- at the Mighty Mart off the reservation date signs, and discuss discounts. in Binghampton, or the $80 price at The reps also provide price cuts in 7-Eleven in Manhattan. exchange for prominent shelf space. “Lorillard and the folks who sell So-

New York State Cigarette Sales (in millions) 120 T otal carton sales 96,858,819 100 80 113,102,500 60 Indian reservation carton sales 40 20,743,966 20 0 31,940,366 2000 2001 2002 2003 2004 2005 2006 2007

Source: New York State Department of Taxation and Finance

3Artcl i e 10 of 194 Show Contents 5Pg a e 8 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity noma and USA Gold most want their supply every New York smoker with products sold,” said Nikki Jimerson at 128 packs of cigarettes. the Seneca’s Cloud Company Smoke Not surprisingly, the black market Shop in Salamanca. “They talk to us exploded. Cigarette smuggling in- more. [They ask,] ‘What can we do to vestigations have quadrupled since promote these cigarettes? What ideas 2002, one New York official estimat- do you have?’” ed. The marketing is not new. Over the When state and New York City years, manufacturers have eyed the taxes increased again last June to reservations’ tax-free status as a way $4.90 per pack, off-reservation con- to increase market share, accord- venience stores saw their cigarette ing to internal industry documents revenues drop 25 percent. uncovered by litigation in 1998. A “There has been a sharp increase Philip Morris presentation noted the in demand for black market ciga- potential “growth” to be made from rettes,” said James Calvin, executive “mega volume outlets” such as reser- director of the New York Association vation smoke shops. “Consumers are of Convenience Stores. “It’s a huge willing to travel to get promotions tax evasion epidemic in New York.” and/or tax breaks in these outlets,” the 1994 presentation said, noting PEACE PIPE AND THE that “changes to purchasing patterns POOSPATUCK may be accelerated by federal excise tax, state excise tax. . .” Similarly, The one-square mile Poospatuck res- Lorillard noted in 1996 that “Indian ervation on Long Island — reminis- reservations have had a significant cent of a 1950s trailer park with its impact on Kent’s performance.” three sand-edged streets lined with Although reservation smoke ramshackle trailers — has become shops have sold untaxed tobacco a hotbed of bootleggers and is New products for decades, their popu- York City’s primary source of illegal larity among smugglers has jumped cigarettes, New York officials say. along with the tax rates. When New The 283-resident reservation went York raised the state tax in 2002 to from purchasing less than 90 million $3 per pack, cigarette shipments to cigarettes in 2000 to more than 2 bil- reservations soared, reaching 10 billion last year. lion cigarettes in 2005 — enough to Jeffrey Cohen, associate chief

3Artcl i e 10 of 194 Show Contents 5Pg a e 9 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity counsel for the Bureau of Alcohol, a shaved head, owlish coke-bottle Tobacco and Firearms’ Northeast di- glasses, and plenty of bling — had vision, calls the illicit cigarette trade for years sold millions of cigarettes to stemming from the Poospatuck “a smugglers, who turned big profits on huge problem.” The tribe, he adds, New York City streets. In the process has “offered no cooperation at all” he became a multimillionaire, with with law enforcement to stop the $30 million tucked away in foreign smuggling. bank accounts, another $8 million in “It’s not a tobacco issue — it’s a real estate, and nearly $4.5 million in sovereignty issue,” responded Poo- jewelry, coins, pens, and watches, ac- spatuck Chief Harry Wallace, who cording to court records. owns the reservation’s oldest smoke The year of Morrison’s arrest, Phil- shop. In 2003, Wallace himself was ip Morris, Lorillard, R.J. Reynolds, implicated in a government wiretap and a number of smaller companies (falsely, he says) for smuggling ciga- supplied him with nearly 400 million rettes, but he was never charged. cigarettes through their distributors. “Our position is if it’s a bad thing, But the criminal accusations didn’t make it illegal,” he said. “If you’re not run Morrison out of business. In the going to make it illegal, then we have almost four years between his ar- the right to sell.” rest and cigarette smuggling convic- The Poospatuck gained notori- tion, more than 1.6 billion untaxed ety in 2004, after Rodney Morrison cigarettes flowed through his smoke — owner of the reservation’s lucra- shop, according to wholesaler tax fil- tive Peace Pipe Smoke Shop — was ings to New York state. charged with firebombing a com- Morrison, reached in jail, declined petitor’s car, beating and robbing to comment, and his lawyer did not another, and financing the murder return calls. of a third. A jury found the 41-year- Morrison’s case and other court old Costa Rica native not guilty on records, along with interviews with everything, except for a firearms smugglers and officials, offer a re- charge and conspiracy to smuggle vealing look inside this teeming untaxed tobacco. He is appealing the black market. Among the smugglers’ conviction, which could net him up favored vehicles: Chevy Astro and to 30 years in prison. Dodge Caravan minivans with their Morrison — built like a brick, with back seats pulled out. At the reserva-

The Supply Chain 1. Cigarette manufacturers 2. Wholesalers make 3. Smoke shops 4. Smugglers sell to state-licensed daily deliveries to sell to sell to vendors wholesalers. smoke shops. smugglers. in the city.

Tobacco Supplies Wholesalers Supplies Reservation Smugglers NY City smoke shops

tion, the shippers stuff as many as 20 at bodegas and markets in New York’s cases — 12,000 packs — into black poorest neighborhoods. trash bags and cram them into their For each trip, smugglers easily vans. As an added precaution, they double their investment. “We had so toss a blanket over the top, then drive much money we wouldn’t know what off the reservation, often times on the to do with it sometimes,” said the for- phone with a smoke shop employee mer New York City smuggler. “It got who acts as a lookout for nearby law to the point we would just open the enforcement. In Suffolk County, Long glove box and throw it in. It went to Island, police arrested 81 people be- casinos, cars — a lot of cars. . . . We tween March 2007 and November blew a lot in the casinos. We would 2008 who later pleaded guilty to il- go in there and blow it on girls, drink legally purchasing untaxed cigarettes the good stuff — Hennessy and Grey from the Poospatuck reservation. The Goose.” City of New York offered evidence in court that the average person was GOING AFTER THE MIDDLEMEN stopped carrying more than 10,000 packs of cigarettes. At the heart of the black market Once back in New York City, the stand seven wholesale distributors drivers unload their stash on a ring who have for decades sold candy and of street-level peddlers who affix cigarettes to New York vendors. They counterfeit tax stamps and sell the buy millions of cigarettes directly cigarettes to established customers from the manufacturers, then ship

3Artcl i e 10 of 194 Show Contents 5Pg a e 11 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity them, untaxed, to smoke shops, ac- for two-thirds of the amount. Loril- cording to distributors’ sales records lard brands alone comprised 2 billion filed with the New York Department of the cigarettes — or “sticks” in in- of Taxation. State investigators have dustry parlance — sold on reserva- alleged in court that, at least on one tions in 2007. occasion, a driver for Queens-based “The cigarette black market is wholesaler Gutlove & Shirvint was enormous, it’s brazen, and it’s car- spotted on the Poospatuck reserva- ried out right under the nose of the tion transferring cigarettes directly government.” — Eric Proshansky, from a Gutlove truck into a smug- attorney for New York City. gler’s van. While these wholesale distribu- Wholesalers flooded New York tors are licensed by the state to affix reservations with 6.4 billion ciga- cigarette tax stamps, nearly all their rettes in 2007. In all, 43 manufactur- business is tax-free. Untaxed reser- ers supplied the reservation smoke vation sales account for 90 percent shops, although Philip Morris, Loril- of business for Long Island whole- lard, and R.J. Reynolds accounted saler Mauro Pennisi Inc., according

New York State Cigarette Sales 2007 (in billions of cigarettes) 10 8 Taxed sales Reservation sales 6,824,029,035 6 2,881,662,815 4 2,007,557,720 2,017,969,800 2 1,457,604,400 848,447,200 0 R.J Reynolds Lorillard Philip Morris Source: New York State Department of Taxation and Finance

3Artcl i e 10 of 194 Show Contents 5Pg a e 12 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity to wholesaler tax reports filed to the ers failed to respond at all. state. Buffalo-based distributor Mil- Only Philip Morris acted upon helm Attea & Bros. sold 135 untaxed the attorney general’s letter. It sent cigarettes for every taxed stick sold a notice to all its wholesalers saying in 2007. And two other licensed tax it would drop them if they sold tax- stamp agents haven’t affixed a single free. The company even cut one of its stamp to their millions of cigarettes distributors, Day Wholesale. But the shipped since at least 2004, tax data wholesaler sued the state and the at- show. torney general, and Philip Morris re- Sal Pennisi, who took over the sumed the sales after the courts ruled business from his father Mauro, in- that the cigarette tax law could not sists that he’s following the letter of be enforced until the tax department the law. “We deliver the cigarettes implemented regulations. Those to the reservation,” he said. “Where regulations centered on a tax exemp- they go from there, I couldn’t tell tion coupon system for reservations you. I don’t particularly care. Until from which New York officials, in line New York state says ‘stop doing it,’ with their forbearance policy, backed we’ll keep doing it. When New York away. state says ‘start taxing,’ we’ll start “That was the end of it,” said Da- taxing.” vid Weinstein, the lawyer who signed In 2006, the office of then-New the attorney general’s letter. York Attorney General Eliot Spitzer At the same time the attorney gen- sent a letter to manufacturers asking eral threw up its hands, the City of them to drop the wholesalers that New York sought to stem the smug- supplied the Indians. “We believe gling by filing a lawsuit against those that many manufacturers are aware same wholesalers. It accused them of of the legal violations of these agents, complicity in cigarette smuggling. and continue to supply them,” the Pennisi, one the wholesalers tar- letter read. “We are putting you on geted in the suit along with Gutlove notice of this conduct and asking for and five others, wonders why offi- your cooperation in ending it.” cials don’t go after the manufactur- Lawyers in Spitzer’s office were ers. “We’re buying all our cigarettes deflated by the response. Some com- from the manufacturers,” he said. panies shifted blame onto the state “And they [the manufacturers] know for not enforcing the law, while oth- where it’s going.”

CIGARETTES SOLD TO A Gutlove’s alleged supplying of Mor- LIGHT POST rison was only part of Philip Morris’ mounting troubles on the Poospatuck In December 2007, on the eve of reservation. At the same time, anoth- opening statements in Rodney Mor- er one of the company’s distributors, rison’s high profile trial, Philip Mor- Mauro Pennisi Inc., was apparently ris ordered its distributors to stop delivering millions of cigarettes to selling to Morrison’s by then noto- benches, trees, and light posts. rious Peace Pipe smoke shop. But Beginning in January 2008, dozens for Morrison’s wholesaler, Gutlove of new smoke shops registered with & Shirvint, Philip Morris products Suffolk County and started ordering made up nearly half the Peace Pipe’s millions of cigarettes from Pennisi’s order, which came to more than 30 Long Island warehouse. Pennisi’s million cigarettes a month. drivers made the daily deliveries Gutlove continued to supply the but investigators haven’t discovered Peace Pipe, according to state and where those cigarettes wound up. city officials. He allegedly sought out Visits to the reservation by ICIJ re- a smoke shop seven hours away on porters revealed the new shops were the Seneca reservation in Gowanda, no more than small signs nailed to New York, to unload shipments of park benches and trees — in cases Philip Morris cigarettes, load them where the signs or addresses existed up again and ship them — often in at all. the same day — to the Peace Pipe. Pennisi began shipping upward The suspected scheme has sparked of 50 million cigarettes a month to a federal criminal investigation into Smoke and Rolls Smoke Shop in Jan- Gutlove’s alleged complicity in ciga- uary, according to industry cigarette rette bootlegging and money laun- sales data. No smoke shop by that dering, according to an October 2008 name exists on the reservation and affidavit by Assistant U.S. Attorney local residents say they have never Anthony Bruce. heard of the place. Philip Morris severed its direct “In Native American land what do buyer agreement with Gutlove in you classify as a store?” responded April. Gutlove declined to comment owner Sal Pennisi when asked about on the allegations against the com- the deliveries. “On the reservation, pany. some of these guys sell out of their

3Artcl i e 10 of 194 Show Contents 5Pg a e 14 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity trailers, which are their homes, be- helm Attea, the primary supplier to cause they don’t have the revenue to the Seneca Nation. build a store.” The City of New York also re- After supplying through Pennisi sponded with a September lawsuit, the seemingly fictitious shops for five this time targeting the Poospatuck’s months, Philip Morris sent investiga- biggest smoke shops. The city is tors to verify the stores’ existence, seeking restitution for the loss of according to an affidavit by Philip taxes and to have the shops shut- Morris Vice President for Customer tered. A federal judge is set to rule Service and Merchandising Randy shortly on whether to order the Lawrence. Three months later, in shops closed while the case plays September 2008, the company sev- out. The tribe has requested that the ered ties with Pennisi — drastically suit be dismissed. stemming the reservation’s supply of While a stream of litigation moves Marlboros. through New York courts, Governor Today the Poospatuck smoke Paterson’s signing of the new ciga- shops are pushing Native brands as rette bill on December 15 may trig- a replacement for now-scarce Marl- ger yet a new wave of lawsuits. Sev- boros, while Lorillard and other eral New York Indian tribes reacted manufacturers continue to supply angrily to Paterson’s move, saying the shops. Lorillard said it “does not that the law violates their sover- profit from the allegedly illegal trade eignty and threatens their liveli- in cigarettes” because it charges hoods. wholesalers the same price whether Proshansky, the attorney for New or not taxes are paid.” But that has York City, said the big tobacco com- not stopped the company from major panies are keeping a close eye on shipments to smoke shop suppliers. all the legal maneuvering, watching In the first seven months of 2008, to see if they are implicated. “It’s a Smoke and Rolls purchased nearly delicate game,” he said. For their 300 million cigarettes — 96 percent part, the tobacco companies insist of which were Lorillard brands. they will be good corporate citizens As pressure increases, Philip Mor- and abide by New York’s new legisla- ris continues to distance itself from tion. “We will comply with the law,” its longtime reservation distributors. said Philip Morris’ Murillo, “as best In December, the firm cut off Mil- we can.” n

3Artcl i e 10 of 194 Show Contents 5Pg a e 15 of 156 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity ‘The Guy In The Wheelchair’ HwnEPo a l aso Smuggler Moved a Half-Billion Cigarettes Across America By Kate Willson Published Online | October 19, 2008

o rge Abraham sits in his port businesses parents’ living room in a single- in El Paso and Jstory rental on a rutted street across the bor- in El Paso, Texas. His soft, sloping der in Juarez. shoulders twitch involuntarily. His Drug dealers in head and contorted right hand are Mexico and FBI the only parts of Abraham’s morbidly agents in Texas obese frame that move by volition — suspected he the result of a 1988 motorcycle acci- made his mil- dent that left him quadriplegic. lions smuggling Behind him, the living room is Jorge Abraham narcotics. But stacked nearly to the ceiling with Abraham had a belongings — including three horse deal that was sweeter than dope. saddles — that once decorated Abraham was the unlikely king- Abraham’s former home, an expan- pin of one of America’s biggest ever sive custom-built mansion. cigarette smuggling rings — a racket Abraham, now 38, lived a luxuri- that spanned three continents and ous life until 2004, with an ever-pres- six states and moved as many as a ent entourage of bodyguards and half-billion contraband cigarettes personal assistants, and at one point across the United States. As lucra- owning four late-model vehicles. Not tive as narcotics, but with far less everyone believed he made his for- onerous penalties, tobacco smug- tune legally operating his import-ex- gling is booming around the coun-

3Artcl i e 11 of 194 Show Contents 5Pg a e 1 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity try — and around the world. Abra- merce are massive, robbing govern- ham, released from federal custody ments worldwide of an estimated in June, recently talked for the first $40 billion to $50 billion annually in time publicly about his operation, tax revenue. The growing trade in the cheap, illegal smokes that Ameri- contraband cigarettes also helps fuel cans increasingly crave, and the bun- an addiction estimated to cost Amer- gled case against him that led from ica alone more than $167 billion an- Chinese coun- nually in deaths, sickness, and lost Law terfeiters and productivity, according to data from enforcement American Indian the U.S. Centers for Disease Control suspected smoke shops to a and Prevention for 1997-2001. At the Abraham was chilling Mexican same time, the trade has attracted smuggling house of death. organized crime gangs and even ter- “This was an rorist groups, who find the mild pen- narcotics. extremely impor- alties and hefty profits ideal for mak- But he had a tant case,” said ing money. On October 20 in Geneva, deal that was John W. Colledge the WHO will bring together 160 na- sweeter than III, former pro- tions to strengthen controls against dope. gram manager tobacco smuggling, hoping to spark for international a concerted crackdown against the tobacco smuggling at U.S. Customs Jorge Abrahams of the world. Service. “Very sophisticated… probably one of the two most significant “MUST BE A DOPER” [federal cigarette] cases.” But Abraham’s case was far from Jorge Abraham was the youngest of isolated. The trade in illicit tobac- three children of a Syrian immigrant co today makes up 11 percent of father and Mexican mother. As a boy, all tobacco sales, and it has made he performed at rodeos across Mexico cigarettes the world’s most widely and sang in a children’s choir — once smuggled legal consumer product, sitting on the knee of the popular ran- according to the Framework Conven- chero singer Vicente Fernández. He tion Alliance for Tobacco Control, an dropped out of school after the 11th initiative under the auspices of the grade. His parents — Nasser and Glo- World Health Organization (WHO). ria — opened first one and then an- The costs of this underground com- other successful steakhouse in El Paso

3Artcl i e 11 of 194 Show Contents 5Pg a e 2 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity and across the border in Juarez. Gloria “This is how border law enforcement boasts about the clientele, who she worked at that time. Mexican-Ameri- said included martial arts action actor can flashing a lot of wealth — must be Chuck Norris. a doper.” The FBI conducted surveil- But the good times didn’t last. lance outside Abraham’s warehouse While on vacation in Acapulco in and inspected his trucks before they 1988, 18-year-old Abraham crashed traveled to Mexico. But they never his motorcycle, fracturing three ver- found drugs, and after a while they tebrae. About the same time, his par- stopped coming around, Abraham ents were struggling financially and said. had to shutter their restaurants. “So I knew back then they were Abraham launched an import-ex- checking; they kind of had a hard-on port business in Mexico in 1991, sup- for me,” Abraham said. He smiled and porting his family and himself by im- shook his head and was quiet. After a porting toys, clothes, and household moment he snorted and smiled again goods from China into Mexico. He as he considered his subsequent deci- met a woman, fell in love, and mar- sion to smuggle cigarettes. ried, then built the family a 6-bed- “What the hell was I thinking? room, 4.5-bath estate complete with Honestly, I didn’t think it was such a elevator and pool in a gated com- big deal.” munity in nearby Santa Teresa, New Mexico. He bought two properties in EASY MONEY Mexico, and opened an import-export business in El Paso. It started in 2000 with a woman — Abraham’s wife drove a new Jeep not his wife, from whom he had sepa- Cherokee. His sister drove a new rated the year before. BMW. He had two new handicap-ac- “I was dating this girl, and her sis- cessible Ford vans at his disposal and ter introduced me to this guy,” Abra- a host of bodyguards who traveled ham said. “This guy from Juarez — he with him between Mexico and Texas. was kind of young, involved in bring- “When I [would cross the border] . ing in cigarettes and crossing them . . I was always surrounded by a lot of into Mexico.” people. I attracted a lot of attention,” Together they bought Marlboros Abraham said. “The FBI hated that.” slated for export from warehouses Colledge said it’s a common story. in Miami and El Paso. That part was

3Artcl i e 11 of 194 Show Contents 5Pg a e 3 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity legitimate. Legally they could export It’s cigarettes. It’s not a big deal.’ So them, paying taxes to the import we started doing it more and more country. Instead, Abraham and his often, until they seized a load.” Al- partner smuggled them into Mexico, though Abraham cannot remember bypassing entrance taxes with the for certain if he and his partner had help of a Mexican customs agent. used fake names to send the untaxed Not long after they started in 2000, cases, Abraham said he got scared the Mexican customs agent was trans- the first time Customs seized his ferred; Abraham was stuck storing shipment of cigarettes. thousands of cigarettes in a bonded “I said, ‘How are they going to re- warehouse in El Paso. His partner said act?’ But nothing happened,” Abra- they had to move ham explained. “So then we waited a “We doubled the cigarettes, or little bit and did it again.” our money just else the product Three months into their new busi- like that…I would go stale. ness, Abraham and his partner split. “I was a very Abraham continued sending ciga- thought, ‘This w e l l - k n o w n rettes to California while selling other is easy. It’s businessman in — legal — imports to buyers in New cigarettes.’” import-export York. During a discussion about sugar — Jorge Abraham merchandise,” with one of those East Coast buyers Abraham said. — who Abraham simply called “the “So I told the customs broker, ‘clear old man” — Abraham mentioned he ‘em, because I’m going to cross ‘em.’ could supply cheap cigarettes. And he did.” But then instead of “Got any buyers for cigarettes?” crossing the cigarettes legally into Abraham asked. Mexico, Abraham sold them to a “Let me find out,” the old man said. buyer in Los Angeles. In doing so, he Soon after, another man called avoided paying mandatory state and Abraham. “So they tell me you can local taxes, instead pocketing the dif- get duty-frees,” the man said, refer- ference. He had invested $200,000 in ring to cigarettes slated for export. the 900 cases — 9 million cigarettes “Can you send them to New York?” — which he shipped through a cargo Abraham said he could, and they mail service. decided on an initial small shipment “We doubled our money just like of one master case — 50 cartons. that,” he mused. “I said, ‘This is easy. The shipment went smoothly, with

3Artcl i e 11 of 194 Show Contents 5Pg a e 4 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity the old man acting as intermediary. would later describe as “Broadway And so it began: Jorge fielded types.” orders over the phone, then placed There was Scott Snyder, who had orders of his own for shipments of served as police marshal and politi- export-bound cigarettes from whole- cal party chairman on the Cattarau- salers in El Paso and Miami. He re- gus Reservation. Snyder lived on ceived those shipments at warehous- the reservation and ran the Iroquois es in El Paso and had them cleared Tobacco Co. out of his home. Don- for export. Instead of exporting the ald “Don” Deland was a one-time cigarettes, however, Jorge sent them professional football player (college in bulk by cargo mail service to buy- All-American, a Buffalo Bill, and a ers in California and New York, des- Dallas Cowboy) turned discount tined for the open market. Most in cigarette salesman. Based out of the demand: Marlboros, but Newport reservation, he Menthols were also popular in black From the operated Inter- communities and Camels in Ameri- reservation, net sites such as can Indian communities, he recalls. Abraham’s smokemcheap. The Indians became big business cigarettes com and du- for Jorge. He moved truckloads of flooded into tyfreetaxfree. the tax-free smokes to the Catta- com, promis- raugus Indian Reservation in west- New York, to ing to sell “the ern New York state, the largest res- be sold by the same cigarettes ervation of the Seneca Nation — a city’s bodegas that you are wealthy tribe known for its sweet- and street buying at the grass woven baskets and elaborate vendors. store for Outra- corn husk dolls. The rural 2,400-per- geous Prices at son, 22,000-acre spread bordering the lowest Tax Free Prices you will Lake Erie was home to Abraham’s find Anywhere!” And then there biggest buyers, who, along with oth- was Timothy “Tim” Farnham, with er “smoke shops,” peddled millions a background in marketing, who of under-the-table cigarettes to the boasted that he once worked for general public. Through the old Bill Clinton’s 1992 presidential cam- man, Abraham’s shipments went to paign. Farnham was the money- a colorful trio of distributors there, man of the three, providing upfront people whom Abraham’s attorney funds.

3Artcl i e 11 of 194 Show Contents 5Pg a e 5 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity From the reservation, the con- men flew down to El Paso, where traband cigarettes flooded into New Abraham agreed to deal directly with York City, eventually being sold them. But first, he said, he needed openly by the city’s bodegas and to find an alternative mode of trans- street vendors. So popular were portation. Fortunately, “Lalo” had a Abraham’s smokes that he became connection. notorious among local smugglers, Lalo was a mustachioed Mexican who referred to him simply as “the from Durango, south of the California guy in the wheelchair.” border. Jorge had met him through a well-connected figure in Mexican organized crime, and Lalo quickly ENTER “LALO” became instrumental to Abraham, With the New York connection in managing shipments and watch- place, business boomed. But by early ing over the business. A former cop 2001, Customs began routinely seiz- in Juarez, Lalo was tall and slightly ing shipments of Jorge’s untaxed overweight, with drooping eyes and cigarettes. Officials never seemed to jowls. He spoke with a slight stutter, know Abraham was behind the ship- Abraham recalled. ments, but just for safe measure, he Lalo mentioned he knew truck- would lay low for a few weeks after ers willing to move drugs. Abra- a seizure. Then the cargo shipping ham asked him if they would move company transporting Abraham’s cigarettes instead. After settling on cigarettes refused to handle any a price, Abraham’s men loaded a more. One of the company drivers 53-foot truck with contraband ciga- “had some trouble” from Customs on rettes and stacked the final 10 feet his way to the Cattaraugus Reserva- with boxes of toilet paper. (Later tion. Until he found another way to he would use jalapeños — a heavier deliver his goods, Abraham felt he product, and thus less likely to be had no choice but to stop the deliv- moved during routine searches at eries. Customs checkpoints.) Lalo and one “Everybody started getting des- of the drivers he had solicited took perate,” Abraham recalled. His New the loads to New York. They arrived York distributors, who until now had without a glitch. operated through the old man, called “They got all excited,” Abraham him and insisted on a meeting. The said. Even before the truckloads ar-

3Artcl i e 11 of 194 Show Contents 5Pg a e 6 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity rived, his New York distributors had have gone unanswered, not only be- a line of customers ready to buy. “If I cause of Lalo’s work as an informant, would have sent them 10 containers a say former officials with knowledge of week, that wouldn’t be enough.” the case, but also because of his ties Business was great for a while — to a murderous Mexican gang and a Abraham was making shipments two house out of a horror flick. or three times a week, each worth Lalo’s real name is Guillermo about $400,000. He opened off-shore Eduardo Ramirez-Peyro. A former bank accounts to store the cash. But Mexican highway patrol officer, he seizures picked up, and soon, Abra- left his federal post for a more lucra- ham said, they couldn’t get anything tive job overseeing a cocaine-storage through. warehouse and distribution center When Abraham told Snyder, De- in Guadalajara. He met Abraham in land, and Farnham that they had to 2001, when he was 29. He had started stop for a while, the buyers balked. working as an informant for Customs So Abraham tried buying contraband and the Drug Enforcement Adminis- cigarettes from Switzerland. But tration the year before, according to those shipments were seized, too. court records. By then, a dozen people in El Paso When Customs sought approval were helping Abraham buy and ship to tap Abraham’s phones in July contraband cigarettes. Five people 2002, they relied solely on informa- in California and a half-dozen in New tion gleaned from Lalo’s work. It York bought Abraham’s products, re- was Lalo who introduced an under- selling the cigarettes in smoke shops cover agent as the drug-smuggling and on Internet sites. Abraham says truck driver, who informed Customs he knew one of them was “a rat.” He agents of Abraham’s shipments, never suspected it might be his stut- and who recorded his phone calls tering sidekick, Lalo. and meetings with Abraham. For his services, Lalo received almost $225,000 over four years. A HOUSE OF DEATH In February 2003, Lalo began Lalo is the reason Immigration and working on a high-profile case for Customs Enforcement officials have Customs and the DEA involving Heri- refused to discuss this case. A dozen berto Santillan-Tabares, one of the calls and e-mails to ICE public affairs leaders of the murderous Vicente

3Artcl i e 11 of 194 Show Contents 5Pg a e 7 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity Carrillo Fuentes Cartel, which con- dle-class cinderblock home near the trols billion-dollar drug routes from city’s industrial center. In August, Lalo Mexico into the United States. The was at the house where — allegedly syndicate, also known as the Juarez on Santillan’s order — he supervised Cartel, was among the hemisphere’s the murder of a Mexican drug traf- most powerful criminal organizations ficker named Fernando Reyes. They in the 1990s, responsible for as much tried strangling him with an electric as half of all drugs that entered the cord, but it broke. So they slipped a United States from Mexico. While its plastic bag over his head and, after power has diminished with the sus- a few minutes, whacked him on the picious death of head with a shovel just for good mea- As a federal leader Amado sure. Lalo recorded the events and informant, Carrillo Fuentes took the evidence that evening to even after in 1997, the or- his handler at ICE, which was trying supervising ganization is still to build a case against Santillan, ac- considered one cording to court records. News of the multiple of Mexico’s four murder reached ICE headquarters in murders, Lalo most powerful D.C. by that night. The next day the received almost cartels, with op- agency’s El Paso office received or- $225,000. eratives in two- ders from headquarters to continue thirds of Mexican the Santillan investigation with Lalo states. Lalo was deeply enmeshed, so as informant. he made the perfect mole. Yet the murders at Calle Parsione- That summer Lalo was arrested ros continued. Between August 2003 near Las Cruces, New Mexico, with and January 2004, 11 more people 100 pounds of marijuana hidden in were brutally slain at Calle Parsione- the tires of his Chevy pickup. The ros 3633 — some or all of them alleg- DEA dropped Lalo as an informant, edly on Santillan’s order and under said then-DEA Special Agent in Lalo’s supervision. Charge Sandalio Gonzalez. But ICE kept him on the payroll — even after A MOVE TO COUNTERFEITS news arrived of the grisly events at Calle Parsioneros 3633. “At the beginning I never had any The house at Calle Parsioneros trouble with him,” Abraham said of 3633 in Juarez is a hodgepodge mid- Lalo. “But after a while, you know,

3Artcl i e 11 of 194 Show Contents 5Pg a e 8 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity something inside me said, ‘Some- sweater, but had removed the tie. thing is wrong with this guy.’” Abraham suffered a moment of sus- One day while visiting friends picion. But Lalo seemed too well- at a local tire shop, Abraham said connected to be an informant. he spotted Lalo driving down from Abraham, meanwhile, was grow- Sunland Park Drive — a road leading increasingly concerned about ing from a cluster of federal law the number of shipments being enforcement offices — wearing a seized. In 2002, he decided to stop dress shirt and tie. trafficking contraband cigarettes “I was inside my van and I said, altogether. His buyers were frantic, ‘Is that Lalo?’ Every time I would but he felt he had no other choice. see him it was boots and jeans and a One of his West Coast contacts — shirt, just like that,” Abraham said, Giashian “Mike” Lin, a Taiwanese motioning with his right hand to his national living in California — then own T-shirt. He couldn’t figure out suggested he import counterfeits why the Mexican man speaking lim- from China, Abraham recalls. Of- ited English would be driving away fered a sample, Abraham was sur- from that section of El Paso. Jorge prised at the quality. The cigarettes had one of his young employees dial appeared authentic. Only when the Lalo’s number. cigarette was lit, did one realize it “Hey, turn back,” Abraham said was counterfeit — it burned un- into the receiver. “I just saw you. evenly. Turn back. I’m at the tire store.” “So I started seeing who was in- Lalo complied. But when he terested,” Abraham said. “Every- climbed from his car, Lalo was wear- body was interested.” ing a sweater. The first containers arrived at the “Are you hot?” Abraham asked. port of Newark, New Jersey, hidden “It’s kind of hot to have a sweater among plastic kitchenware, teapots, on.” and toys. The loads were stashed Lalo’s face turned a shade of at Snyder’s home on the Cattarau- pink, and he mumbled something gus Indian Reservation. Abraham about being cold. sold his counterfeit Marlboros to “Well, take your sweater off,” the same buyers as his duty-free Abraham ordered. Lalo complied. smokes — in New York, California, He wore a dress shirt beneath the and Kentucky.

3Artcl i e 11 of 194 Show Contents 5Pg a e 9 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity “At that time the Chinese were so of Marlboro “Reds” and “Whites.” happy,” Abraham said. “They want- Abraham’s cell wasn’t the only ed to move 10 to 20 containers a one importing counterfeits from week.” Twenty containers hold 200 China. By 2002, bogus Chinese ciga- million cigarettes. By then, China rettes were pouring into the United had emerged as the world’s primary States, attracting a rogue’s gallery source of counterfeit cigarettes, and of distributors — Chinese smug- Abraham was a good client. So the glers and Russian mobsters joined Chinese suppliers sent California in, along with Abraham’s Mexican- businessman Dean Miller to meet American gang. There was even a with Abraham in El Paso. ring of Orthodox Jewish smugglers. Miller launched Megafood, a Abraham’s New York buyers — De- successful chain of food stores, in land, Snyder, and Farnham — were 1987, but the firm ran into financial also moving contraband cigarettes troubles and went bankrupt in 1994. from Simon and Michael Moshel, Miller was sued for fraud in 1997 by a pair of pious Jewish brothers a company that loaned him money from New York City. The Moshels to keep his failing business afloat. started out selling fruits and veg- Slapped with a $2.3 million judg- etables when they immigrated to ment in 1998, Miller filed for per- the United States from Israel. After sonal bankruptcy in 2000. He now selling their produce business, they wanted to be Abraham’s sole Cali- launched a plastic bag manufactur- fornia buyer, exclusively supplying ing plant, and then, among other counterfeit Marlboros to West Coast ventures, began importing goods consumers. such as jeans, counterfeit batteries, Abraham and Miller struck a deal, and fake Marlboros. and Miller agreed to travel to China Although tobacco smuggling may with a carton each of Marlboro regu- seem tame compared to drug traf- lars and Lights, so the counterfeiters ficking, it is a tough racket, and could update the barcodes on the car- Jorge could play hard. When Farn- tons — because, Abraham explained, ham, the moneyman of the New Marlboro had started updating the York buyers, owed him $500,000, codes every few months to combat Abraham stopped shipments, sent counterfeiting. Abraham started or- his father to settle the account, and dering regular shipments from China called Lalo. “My dad, they leave to-

3Artcl i e 11 of 194 Show Contents 5Pg a e 10 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity morrow at 6 in the morning to go But those last shipments, people see that [expletive],” Abraham told started complaining they wanted a Lalo, in a February 2003 conversa- rebate [because of poor quality]. I tion recorded by law enforcement had a sample at home. So I told one agents. “We definitely need to pick of the guys to smoke it.” The filter him up and take from him whatever was half the regular size, and people we can get from him. . . . And then were burning their fingers. take him down.” “So I stopped,” Abraham said. “Then fix him up?” Lalo asked. Meanwhile, Miller told Deland “See how much they want,” Abra- and Snyder that he could bring in ham said. “If we can do it this week, containers without Abraham’s help. let’s do it this week,” quite a bit later But what no one knew was exactly adding, “Yes, whack him, because if how Abraham got his shipments past not, the other guys are going to say, customs. When he tried on his own, ‘Oh, he . . .’” one of Miller’s shipments was seized Abraham left the sentence unfin- in California. Another was seized in ished. Abraham didn’t pursue a hit Newark. During the second seizure, man to carry out the murder, and Deland and Snyder were arrested. his attorney said Abraham never se- Abraham’s Chinese contacts riously entertained the idea. urged him to continue ordering Around the same time, Abraham shipments in spite of the arrests and sent Miller to Buffalo, New York; his concerns. Smuggler Mike Lin containers had arrived at the port flew in to talk to him. So did another in Newark and been transported to California-based smuggler, Jeffrey a warehouse in Buffalo for disper- Liu. Abraham’s direct contact in sal. Miller was to arrange shipment China called, trying to convince him for some of the containers to his to continue the business. warehouse in California. Abraham “The Chinese lady would call me felt something was wrong, that law almost every day from China, which enforcement was watching. He sug- I didn’t understand jack [expletive] gested they stop shipments for a bit. because she hardly spoke any Eng- “The Chinese didn’t want to stop. lish,” Abraham said, laughing. Deland didn’t want to stop. Dean Abraham brought in four more Miller didn’t want to stop,” Abra- containers, but felt law enforcement ham said. “So I brought in 10 more. closing in. His subsequent deci-

3Artcl i e 11 of 194 Show Contents 5Pg a e 11 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity sion was perhaps not logical, and he 92 counts of trafficking in counter- smiles today when he considers it. feit cigarettes, as well as wire and “I decided, ‘I’m going to see how mail fraud — enough charges to put close they are.’” Abraham said. him away for 300 years. Abraham “So I started moving duty-frees initially asked the court to release again. They started seizing every- him pending trial. “They denied my thing. Nothing, nothing was getting bond, and said I was a flight risk and through. I was losing money more I was going to leave. And I probably and more, containers and contain- would have,” Abraham said with a ers.” Over time, Customs seized 20 grin. “If they had given me a bond, containers of contraband cigarettes, I probably would have left, but then costing Abraham $8 million. I only got five years. I’m glad they Abraham had ordered his buyers, didn’t [give me bond]. I should have movers, and sellers to call him from written them a thank you letter.” disposable pre-paid phones, and The real thanks should have gone gave them a number for a dispos- to Lalo, who by then was about to be able phone he had purchased. exposed in the sordid, high-profile “Did they listen? No.” Abraham drama at the drug cartel safe house said. “They would call me back from in Juarez. Tainted by the murders, their houses. . . . I guess they didn’t he was no longer a credible wit- see how bad it was going to be.” ness against Abraham. Unwilling to put Lalo on the stand, prosecutors agreed to settle short of trial. Abra- THANK YOU LETTER ham pleaded guilty in April 2005 to a The noose finally tightened around single count of conspiracy to smug- Abraham’s ring in February 2004. gle cigarettes into the United States In a SWAT team sweep by ICE and and was sentenced to five years in local police, authorities arrested prison. He agreed, along with his fa- Abraham, his father, and a dozen ther, to pay nearly $6 million in res- other men. Because the local jail titution — a seemingly insurmount- lacked the proper medical facilities, able sum to the retired restaurateur Jorge spent the next six months in a now in his seventies and his quad- hospital bed, watching TV and mak- riplegic now-unemployed son. ing friends with the U.S. marshals Abraham’s New York distributors who acted as guards. Abraham faced — Snyder, Deland, and Farnham —

3Artcl i e 11 of 194 Show Contents 5Pg a e 12 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity were each sentenced to between 18 far-reaching Juarez Cartel as soon and 27 months in prison. Snyder is as he returned to Mexico. But Lalo currently serving again as chairman never got the promise of a green of the Seneca Nation’s sole politi- card in writing, and ICE swiftly cal party, while his father hopes to placed him into expedited deporta- regain the tribe’s presidency. Abra- tion proceedings. His plea for asy- ham’s California connection, Dean lum is still pending in federal court Miller, received four years and was while he remains in a deportation ordered to pay a $10,000 fine. Abra- center at an undisclosed location. ham’s father was sentenced to 3 Jorge Abraham was formally re- years in prison. His wife faithfully leased from prison in June 2008 — visited every week. having completed his final months Abraham and his pals weren’t the on house arrest. Even before he was only ones getting deals because of officially free, the telephone started Lalo. Santillan, the Juarez Cartel to ring. Old friends wanted to know leader, was lured into the United if he was back in business, he ex- States in January 2004, arrested and plained with a chuckle and a shake indicted for five of the murders at of his head. the “House of Death,” in addition to On a recent Wednesday evening drug trafficking charges. But fear- back in El Paso, he sat at his mother’s ing their case would implode under dining room table. His father Nass- cross-examination of their murder- er stood beside Abraham’s wheel- ous informant, prosecutors agreed chair offering steaming spoonfuls of to drop the murder charges and all homemade chicken soup to his son. but one count of conducting a crimi- His mother Gloria bustled, roasting nal enterprise. Santillan made a plea corn tortillas over the open burner. deal for 25 years in prison. The kitchen smelled of jalapeños and Lalo’s fate remains unknown. cilantro. A string of telephone calls Seemingly overnight, the former repeatedly broke the calm. Nasser or Mexican cop went from a prized a young Latino man held the phone informant to an undesirable illegal to Abraham’s ear, who told each call- alien. Lalo claimed in court that ICE er to ring again in 15 minutes. had promised him a green card in Abraham plans, he said, to start exchange for his work and said he another business someday, import- feared he would be murdered by the ing goods from China to Mexico. n

3Artcl i e 11 of 194 Show Contents 5Pg a e 13 of 136 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity Smoke2U TbaccoSo ales Take Off in Cyberspace By Te-Ping Chen Published Online | December 19, 2008

here’ s sOMething odd City can cost up to $80; that same about PO Box 365, Irving, carton, untaxed, costs just $40.) TNew York. Located on the There’s one problem, though: The Seneca Nation — nestled just at the trade is illegal. Empire State’s southwestern tip — In 2007, New York’s reservations the box is the mailing address for at — home to fewer than 17,000 people least 10 online vendors registered in — sold a towering 6.4 billion ciga- far-flung locations, from New York rettes, leaving state revenue officials City to Ankara, Turkey. Boasting scrambling. Every year, the state names like BigChiefCigarettes.com, loses nearly $1 billion in city and Smoke2U.com, and EZTobacco. state taxes from reservation sales. com, the sites bear no apparent af- While the Supreme Court has ruled filiation to one another, except that that states can collect taxes on tribal they all sell one product: untaxed sales to non-natives, ever since a vio- cigarettes. lent Seneca protest beat back then- For years, tax-free cigarette sales Governor Pataki’s attempt to enforce on New York reservations have made such taxes in 1997, successive gov- the state among the country’s top ernors have been loath to entangle destinations for discount smokes themselves in the issue. — and not surprisingly, either. With On December 15, though, with New York City home to the nation’s the state facing a projected $51 bil- highest cigarette taxes, the tax-free lion budget shortfall over the next trade offers a prodigious payoff for four years, Governor David Pater- the enterprising cigarette vendor. son signed a law that mandates tax (Between state and city taxes, a collection on reservation tobacco carton of cigarettes in New York sales. Specifically, the law requires

3Artcl i e 12 of 194 Show Contents 5Pg a e 1 of 76 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity that cigarette manufacturers supply But these days, with the advent only wholesalers that certify their of the Internet, it has become a lot products won’t be resold, tax-free, easier to jump into the bootlegging to reservations (and in turn distrib- game: All it takes is a modem and uted through smoke shops and on- access to a post office. Likewise for line vendors). But the bill’s impact smokers, tax-free cigarettes are just remains to be seen. State officials a handful of clicks away. would have to overcome past reluc- Over the past decade, as ciga- tance to collect taxes on reservation rette taxes have soared throughout cigarette sales; the United States — rising an aver- Websites Indian lead- age of nearly 90 percent between catering to ers this week, 1998 and 2002 alone — websites tax-dodging meanwhile, ex- catering to tax-dodging smokers U.S. smokers pressed vigor- have proliferated. In 2006, an es- ous opposition timated 772 sites were selling to jumped from to the new law. U.S. consumers, up from just 88 in just 88 in 2000 The law, also, 2000. According to Jeff Cohen, as- to some 772 in does not stop sociate chief counsel for the Bureau 2006. tribes from sell- of Alcohol, Tobacco, Firearms and ing untaxed, na- Explosives’ (ATF) Northeast divi- tive-manufactured brands. sion, it’s common for entrepreneurs The United States’ patchwork to maintain five or six differently of state cigarette tax laws has long branded websites to drive traffic, spurred a brisk industry of cross- “even though they’re just shipping state smuggling. It’s not hard to see from one address.” why: While the tax in a tobacco state Some sites are based in low-tax like South Carolina is a low 7 cents states such as the Carolinas; others per pack, the rates in a high-tax sell duty-free packs from overseas. state like New Jersey are up to 36 Increasingly, overseas cigarette times higher. In the 1960s, mobsters vendors drive traffic: The number of such as John Gotti — the flamboyant sites based overseas jumped from at “Dapper Don” of Mafia fame — were least 10 percent in 2003 to over 45 known to capitalize on the trade’s vast percent by 2006, according to Kurt profit margins, bootlegging cigarettes Ribisl, an associate professor at the across state lines. University of North Carolina’s Gill-

3Artcl i e 12 of 194 Show Contents 5Pg a e 2 of 76 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity ings School of Global Public Health, driver Joseph Roosa was charged who has extensively studied online with using a resident of the Alle- sale patterns. gany reservation as a front for an In the United States, the real online cigarette business that sold action is taking place on Indian $4.9 million worth of tax-free ciga- reservations. As of 2005, nearly rettes throughout New Jersey. (The two-thirds of websites had some case is still pending.) This July in apparent affiliation with Indian res- another case, Lloyd Long pleaded ervations. For western New York’s guilty to using a similar ruse to pur- Seneca Nation, in particular, the chase tax-free cigarettes for sale on online business two online sites, EZsmokin.com and Increasingly, has developed MightySmokes.com. overseas into the tribe’s Beyond lower prices, online sales cash cow. To- also offer smokers broader options, cigarette gether, two including popular discount brands vendors drive Seneca reserva- such as Seneca and Niagara. That, traffic: The tions accounted in part, may help account for why number of for over three- Philip Morris has been among online non-U.S. sites quarters of all sellers’ chief opponents, filing more jumped from at Indian websites than 20 different suits against such in 2005. A 2003 retailers in recent years. The com- least 10 percent tribal study pany has also actively pushed model in 2003 to over found that fully legislation to curb online sales in 45 percent by 95 percent of states around the nation. Over the 2006. Seneca sales past decade, about 40 states have were conducted passed laws to limit or ban the di- over the web or phone (the rest rect shipment of tobacco products were sold over-the-counter in reser- to consumers, to varying effect. (In vation shops). 2007, the Supreme Court, citing The opportunities are such that concern about interstate commerce even those who cannot claim tribal interference, struck down a Maine heritage have allegedly sought to law that required shipping compa- exploit the status it confers. This nies to verify a recipient’s age be- September, shopping plaza devel- fore delivering tobacco to a home oper and former New York City bus address.)

3Artcl i e 12 of 194 Show Contents 5Pg a e 3 of 76 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity To fight the trade, meanwhile, ninth graders had made at least one state officials have turned to the cigarette purchase online. Likewise, obscure 1949 federal Jenkins Act, opponents say, low online prices which requires all vendors to report discourage smokers who might oth- cigarette sales to the relevant state erwise be pushed by high taxes to tax authorities. Failure to submit re- kick the habit. ports, though, is only a misdemean- And though thumbing your nose or. Accordingly, almost no cigarette at the taxman may be a quintes- vendors bother to file, and once the sential American sport, the overall packs are delivered, few consumers tax losses add up — particularly at remit the owed taxes, either. Some a time when at least 43 states are do not realize they are still required facing budget shortfalls. “There’s a to pay taxes on Internet purchases, mad dash right now to get money while others take a more generally into state coffers,” said Timothy cavalier attitude toward the law. As Quirin, an analyst at CCH, a private Patrick Fleenor, chief economist at research group that tracks tax laws. nonpartisan research group the Tax “States are looking at any revenue Foundation, puts it, buying untaxed stream they can tap into.” In 2005, cigarettes online “is still not really online sales cost states an estimated considered a crime, but more like a $2 billion in lost taxes, according to form of bargain shopping.” ATF’s Cohen. But opponents of the online ciga- Virtually all online cigarette sales rette trade charge that sales aren’t are illegal, for one or more reasons: so innocuous, and that they can Vendors do not take sufficient steps spur addiction among underage to confirm customers’ ages, fail to smokers: “We spend all this time report their shipments under feder- trying to stop kids from buying ciga- al law, or — depending where they rettes at 7-Eleven, when they could ship — they break laws prohibiting more easily be at home buying ciga- direct cigarette shipments to indi- rettes with their mom’s credit card,” vidual consumers. said Marlene Trestman, special as- Questions of jurisdiction con- sistant to Maryland’s attorney gen- tinue to hamstring state efforts to eral. Few online vendors verify pur- reduce sales, especially given the chasers’ ages, and one 2005 western prominence of reservation-based New York study found 6.5 percent of vendors. While the Supreme Court

3Artcl i e 12 of 194 Show Contents 5Pg a e 4 of 76 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity has ruled states have the legal right $36 million); Wisconsin, at least to require that cigarette retailers $1.4 million; Oregon over $2 mil- on reservations collect taxes on lion. Those amounts, too, are only cigarettes sold to non-tribal mem- the tip of what is owed, given that bers — and keep records for each states are only contacting custom- sale — tribal sovereign immunity ers of sites that have given up their bars states from directly suing trib- information. The $26.3 million al governments for lost revenue. Pennsylvania is currently seeking, Accordingly, states have sought for example, represents losses from alternate routes, cobbling together just a half-dozen sites. a strategy of pressure on retail- Tax bills appear to have had ers and consumers, as well as the some deterrent effect: Oregon of- shippers and credit card companies ficials report that while in 2005, that help supply them. States such about 2,500 smokers a month were as California have used outreach to frequenting two sites sued by the vendors, encouraging them to re- state — Smartsmoker.com and Or- port their sales, or — in the event dersmokesdirect.com — today, that that strategy fails — subpoena- figure has dropped by more than ing or suing them to winnow out half. customer information. Using data Authorities say it is difficult gleaned from these efforts, in re- to know if the smokers simply cent years over a dozen states have switched websites, so they are also gone so far as to bill customers targeting vendors’ ability to ship directly for unpaid taxes. Alaska, and receive payment. In 2005, state for example, has sent letters to attorneys general won a commit- roughly 5,000 delinquent taxpayers ment from credit card companies (including some tax bills for up to and common carriers such as DHL $30,000). Since 2005, Pennsylva- and UPS to stop allowing their ser- nia has billed 31,000 smokers for vices to facilitate the trade. At the $26.3 million in unpaid taxes, and New York Department of Taxation so far has retrieved $16 million in and Finance, spokesman Thomas payment. Likewise, Connecticut Bergin observes some successes has recouped at least $2.48 mil- from the agreement, noting that lion through such efforts; Michigan, since hitting a high of 47.6 million $12.5 million (out of a total owed cartons per year in 2005, overall

3Artcl i e 12 of 194 Show Contents 5Pg a e 5 of 76 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity shipments to reservations slowed one step ahead of us.” In the latest to 31.9 million in 2007. One study development, she said, California likewise found that in the year fol- secured an agreement with First lowing the agreement, the Internet Regional Bank to stop processing purchase rate among smokers fell unlawful cigarette purchases — to from 1.2 percent to 0.4 percent. her knowledge, the first of its kind The crackdown has hit the Sen- in the nation. But as Kaplan notes, eca reservation, where 1,500 people there are thousands of other banks were once employed by the online out there who have yet to sign on. business. Since 2005, though, Rick Online sites are also moving off- Jemison, spokesman for the Sen- shore, beyond the reach of effective eca Sovereign Partnership, said U.S. law enforcement. In one high- that many online shops have folded, profile 2004 case, the ATF raided a leaving hundreds out of work. cargo plane that touched down at Yet while credit card companies John F. Kennedy Airport bearing 60 have pulled back, consumers can million duty-free cigarettes from a still pay by direct electronic banking Switzerland-based company, Ota- transfer or personal check. What’s media. The company’s original URL more, though common carriers have Yesmoke.com was shut down, but agreed to stop untaxed shipments, its operators simply packed up shop to date, the U.S. Postal Service has and today continue to do business refused to accede to such an agree- from Italy. ment. (Postal officials note that Pri- “Websites used to be very clear ority Mail, which handles most ciga- about where their stated location rette shipments, can’t be inspected was, but more and more, you can’t without a search warrant, and that figure out where they’re from,” Ri- “extraordinary resources” would be bisl said. According to his research, needed to enforce restrictions on while about 50 percent of online tobacco mailings.) cigarette sites are based in the U.S., Thus, even with states’ best dili- in recent years, more and more sites gence, cigarettes continue to slip have been appearing abroad as part through. “They [the Internet sell- of a complicated international sup- ers] are resourceful,” said Califor- ply chain. “A website might say it’s nia Deputy Attorney General Laura based in Irving, New York, and that Kaplan. “They always seem to be the cigarettes come from overseas,

3Artcl i e 12 of 194 Show Contents 5Pg a e 6 of 76 Tobacco Underground: Part One | North America ©2009 Center for Public Integrity like the British Virgin Islands. But passed the House of Representa- then we’ll look at the actual ship- tives this September, and is expect- ping label when it arrives, and it ed to receive a favorable reception might say ‘customs duty, Ireland.’ ” in the 111th Congress in 2009. U.S. authorities are hardly alone Although the spate of state ac- in feeling flummoxed by the trade. tions hasn’t stemmed the tide of Canada, for example, has experi- online sales, they may be show- enced a jump in Internet and mailing an impact. Jeff Kimbel, for ex- order sales, with related seizures ample, a 45-year-old smoker from rising by 151 percent to 1,610 from Long Beach, California, was ac- 2006-2007. customed to getting his untaxed But given how one site can pop Seneca-brand cigarettes in discreet up as quickly as another is shut- brown boxes arriving from Buydis- tered, suppressing the trade has countcigarettes.com. After the site become something of a global game was sued this year, though, his ship- of “whack-a-mole.” “We see a lot of ments were disrupted, and he was sites operating outside the country: double-billed for his purchases. Moldova, Israel, Russia, Ukraine,” Similar consumer complaints of be- Kaplan said. Despite states’ best ef- ing fleeced online abound. forts, she said, “We haven’t noticed “At one point the site was based in a real reduction in sales.” New Mexico, and then I heard they To that end, advocates such as were moving to Kentucky,” Kimbel Representative Anthony Weiner, said. “Now the cigarettes come out Democrat of New York, and the of Irving, New York.” (Kimbel — National Association of Attorneys who paid by direct debit — said he General are actively pushing the never realized that he was violating optimistically titled Prevent All state tax laws.) Cigarette Trafficking (PACT) Act, With the accelerating state and which would — among other provi- federal scrutiny of Internet sales, sions — make failure to report sales some online cigarette purchasers under the Jenkins Act a felony, ban figure that even with higher costs, mailings of tobacco through the U.S. they’re better off buying in person. Postal Service, and codify existing As one smoker recently posted on- agreements with credit card compa- line: “No online cigarettes for me. nies and common carriers. The bill Find local store, pay cash, no trail.” n

3Artcl i e 12 of 194 Show Contents 5Pg a e 7 of 76 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity Terrorism And Tobacco Etremistsx , Insurgents Turn to Cigarette Smuggling By Kate Willson Published Online | June 28, 2009

o nr ce turies, blue- Among those who control this turbaned nomadic Tuareg underground trade is al-Qaeda in Ftribesmen have led caravans the Islamic Maghreb (AQIM), an of camels across the expanses of Algeria-based terrorist organiza- the Sahara. Laden with millet and tion widely believed to have been cloth from Africa’s West Coast, the backed by Osama Bin Laden. De- caravans traveled unmarked paths scended from the Salafist Group to trade for salt and dates in Tim- for Preaching and Combat (known buktu, across the sand plains of Ni- by its French acronym, GSPC) the ger, and into the mountain oasis of group has hundreds of members the Algerian south. and is blamed for a bloody cam- Smugglers take the same routes paign of bombings, murders, and today — driving SUVs along paved kidnappings across North Africa roads or with guidance from the Tu- and Europe. The lead smuggler, areg and satellite phones — to move Mokhtar Belmokhtar, 37, is blamed weapons, drugs, and, increasingly, for the 2003 kidnappings of 32 Eu- humans — through the Sahara for ropean tourists and the 2006 mur- transport across the Mediterranean der of 13 Algerian customs officials. Sea. The paths are no longer known “They are a significant threat,” says as the Salt Roads of the Tuareg, Lorenzo Vidino, author of Al Qaeda but as the “Marlboro Connection,” in Europe. “Of all Islamic terrorist named after the most lucrative con- groups, they have the most exten- traband along this 2,000-mile cor- sive and sophisticated network in ridor. Europe… And among their activi-

3Artcl i e 13 of 194 Show Contents 5Pg a e 1 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity ties, smuggling is particularly im- trade. “Worldwide — it’s no exag- portant.” geration… No one thinks cigarette Military officials and scholars smuggling is too serious, so law en- say cigarette smuggling, in fact, has forcement doesn’t spend resources provided the bulk of financing for to go after it.” AQIM. The money comes not direct- “Cigarettes are easy to smuggle, ly from smuggling, but from charg- easy to buy, and they have a pretty ing protection fees to others moving good return on the investment,” the untaxed cigarettes through the adds David Cid, a former FBI coun- Sahara. The most smuggled brand terterrorism agent and deputy di- is Marlboro, followed by Gauloises rector of the Memorial Institute and American Legend, as well as for the Prevention of Terrorism in counterfeited Rym, a popular Alge- Oklahoma City. “Drug dogs don’t rian brand. alert on your car if it’s full of Cam- Al-Qaeda’s North Africa affiliate els.” And, he notes, “The other ad- isn’t alone. After crackdowns on vantage is you don’t go to jail for 50 fundraising following the 9/11 at- years.” tacks, terrorist groups worldwide Traditional terrorist networks have increasingly turned to crimi- aren’t the only armed groups mak- nal rackets, officials say. And smug- ing money from the underground gling cigarettes — either untaxed cigarette trade. Insurgents and or counterfeit — has proved a par- paramilitary forces are also on the ticularly lucrative, low-risk way to take. Many of the world’s longest- fund operations. running civil wars are fueled by Hezbollah, the Taliban, and al- contraband, according to a 2002 Qaeda are involved in smuggling study by Stanford University’s cigarettes; so are the Real Irish Re- James Fearon, and tobacco is only publican Army (Real IRA) and the one of the favored commodities. Kurdistan Workers’ Party (PKK). Cocaine smuggling has largely pro- Terrorist financing through ciga- pelled the FARC’s 40-year insur- rette smuggling is “huge,” says gency in Colombia. Diamonds have Louise Shelley, a transnational funded civil wars in Sierra Leone crime expert at George Mason and Angola. And opium has fueled University and an adviser to the drawn-out conflicts in Burma and World Economic Forum on illicit Afghanistan.

3Artcl i e 13 of 194 Show Contents 5Pg a e 2 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity The increasing use of smuggled the Provisional IRA announced in tobacco by terrorist and insurgent 2005 that it would henceforward groups parallels the rapid growth of use only peaceful means. The Real a multibillion-dollar trade in ciga- IRA continues to employ terrorist rette smuggling around the world. tactics including robbery, bomb- Huge tobacco black markets have ings, and assassinations, most re- arisen from New York State to Para- cently shooting guay to Eastern Europe, as smug- Combined, the dead two Brit- glers move cheap and counterfeit IRA groups ish soldiers in cigarettes to sell in lucrative high- reaped an Northern Ire- tax regions. The illicit trade is fu- land in March. eling addiction, say health experts, estimated “ C i g a r e t t e by making inexpensive cigarettes $100 million smuggling has widely available, while robbing in proceeds definitely been governments of sorely needed tax from cigarette a major source revenue. At the same time, officials smuggling of funding for warn, the booming black markets over a five- the Provisional are fueling not only some terror- IRA — not only ist groups but dozens of organized year period, the Real IRA — crime gangs, who find the big prof- according to a and other ter- its and low risk hard to resist. 2004 U.S. report. rorist groups in In addition to al-Qaeda in the Is- Northern Ire- lamic Magreb, at least a half-dozen land,” said Rogelio Alonso Pascual, terrorist groups and insurgencies an IRA expert teaching at Madrid’s have profited from the black mar- Universidad Rey Juan Carlos. ket in tobacco. Among the others: The Real IRA has flooded Ire- land with contraband cigarettes and imported counterfeit versions THE IRA of popular brands. Authorities say Both the Provisional Irish Republi- the group is responsible for nearly can Army and the militant splinter all the smuggled tobacco seized in group Real IRA have used cigarette Northern Ireland, and they say cig- smuggling to finance their opera- arette smuggling has emerged as a tions. While both groups seek the top funding source for the organi- unification of the island of Ireland, zation. Combined, the IRA groups

3Artcl i e 13 of 194 Show Contents 5Pg a e 3 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity reaped an estimated $100 million in in Afghanistan, the insurgents in- proceeds from cigarette smuggling creasingly sought sanctuary along over a five-year period, according the ungoverned border regions of to a 2004 report by William Billing- Pakistan where both the Taliban slea, an analyst for the U.S. Bureau and the vast majority of Pakistanis of Alcohol, Tobacco, Firearms, and are Sunni Muslim and ethnic Pash- Explosives. tuns. The Khyber Agency, a border In March, a Miami man was in- province boasting the most-traveled dicted in connection to a cigarette trade route between the two coun- smuggling ring with ties to the tries, is also the hotbed of cigarette Real IRA. The arrest comes after a counterfeiting in Pakistan. seven-year investigation stretching from the Canary Islands to Panama, THE PKK through the port of Miami and on to Ireland and the UK. U.S. and Euro- The Kurdistan Workers’ Party pean officials declined to comment, (PKK) long controlled the smug- saying the case is “complex” and gling routes between Turkey and ongoing. northern Iraq. Blamed for thousands of deaths since its inception in 1978, the leftist group comprised THE TALIBAN of Turkish Kurds has sought to es- In the restive tribal belt of Paki- tablish a Marxist state in southeast- stan — where Osama bin Laden is ern Turkey. The PKK has carried thought to be hiding — some of the out bombings of Turkish govern- most hunted Taliban militias collect mental security forces and popular money from cigarette smugglers Turkish tourist sites. in exchange for allowing Marlboro The PKK funds itself through do- knock-offs and cheap local brands nations from sympathizers, traffick- to flow into Afghanistan and China. ing in narcotics and arms smuggling, Cigarettes have become an increas- and by charging a fee for every con- ingly important source of financing tainer of cigarettes allowed to pass for the groups, second only to the through its territory. Whereas the heroin trade, according to Pakistani group controlled the flow of contra- intelligence officials. band cigarettes into Iraq during the As NATO forces battled Taliban 1990s, they now control the flood

3Artcl i e 13 of 194 Show Contents 5Pg a e 4 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity of counterfeit cigarettes stream- is serving time at a medium-secu- ing out of Iraq, according to Sha- rity federal prison in Indiana. His ron Meltzer, an expert on cigarette projected release date: September smuggling and transnational crime 2135. at American University. “It’s still go- The U.S. Bureau of Alcohol, To- ing on; it’s just changed direction,” bacco, Firearms and Explosives she said. “Now counterfeit factories (ATF) is investigating a number of are operating openly in Iraq.” cigarette smuggling cases that appear linked to terrorism, according to Associate Chief Counsel Jeffrey HEZBOLLAH Cohen. “It’s not because terrorists Hezbollah, the Lebanon-based mili- like cigarettes particularly, but be- tia and political organization, is also cause it’s an easy way to finance engaged in tobacco trafficking. The things,” Cohen says. In most U.S. radical Shiite group receives a sig- cases, groups send money through nificant percent of its financial sup- hawala, a parallel banking remit- port from Iran, but also relies on tance system that relies on family, proceeds from smuggling cigarettes ethnic, and regional ties. Because and other goods. there are few records, he adds, “it’s In three connected U.S. cases difficult to know how much of this since 2000, defendants tied to is going to terrorists and how much Hezbollah have pleaded guilty to is going to food and education.” smuggling low-tax cigarettes from The use of hawala makes it ex- North Carolina and untaxed ciga- ceedingly difficult to track money rettes from New York Indian res- in such cases, agrees Phil Awe, act- ervations to the high-tax state of ing chief of ATF’s alcohol and to- Michigan. Nearly 50 defendants bacco enforcement branch. “The in- have faced federal charges ranging formation is anecdotal,” says Awe, from cigarette smuggling and mon- who investigated the U.S. Hezbol- ey laundering to material support lah cases. “There are a lot of small for terrorists. Investigators say the villages [in the Middle East] where operations made millions of dollars, Hamas, Hezbollah, and others are some of it traced back to Hezbollah ruling. If you’re sending money leaders in Lebanon. The network’s back to those small villages where kingpin — Mohamad Hammoud — extremist groups operate, there’s a

3Artcl i e 13 of 194 Show Contents 5Pg a e 5 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity good chance some of that money is cially Marlboros, Kents, and Lucky ending up with them.” Strikes, made up a large portion of the trade goods that were smuggled into Colombia and financed by this FARC process.” FARC has evolved from the world’s Anyone trafficking drugs from largest, strongest, Marxist-based Colombia to the United States is at insurgency into what is widely seen least tangentially involved in smug- today as a criminal outfit that is the gling cigarettes from the United world’s largest supplier of cocaine. States to Colombia, authorities say. The group began by charging tax- Traditional drug cartels, left-wing es on coca-growers in FARC-con- guerrilla groups, and the equal- trolled regions but has since devel- ly brutal right-wing paramilitary oped into a self-sustaining cocaine groups jostle for market share. The trafficking organization. players and brands have changed To launder its money, FARC and over the years, but investigators other Colombian narcotraffick- say the market remains the same. ers use what is known as the black The primary transit points for the market peso exchange in which cigarette black market run through they smuggle drugs to the U.S. and Aruba and Panama. Panama cus- sell the dollars to informal bank- toms authorities confirmed in April ers called “peso brokers.” The peso a seizure of cigarettes belonging to broker in turn sells these dollars to FARC, but could not provide details Colombian exporters who buy U.S. pending an ongoing investigation. goods with the laundered funds. Those export goods are then smug- THE CNDP gled back into Colombia. “In Colombia, well established Seven thousand miles from the co- drug routes were easily converted ca-rich plains of Colombia, in the into cigarette-smuggling routes,” dense jungles of eastern Congo, Interpol’s Ralf Mutschke said in rebels allegedly profit from a mil- written testimony to the House lionaire tobacco tycoon who re- Committee on the Judiciary in cently pleaded guilty to cigarette 2000. DEA’s Alvin James said U.S.- smuggling. manufactured cigarettes, “espe- A U.N. Security Council investiga-

3Artcl i e 13 of 194 Show Contents 5Pg a e 6 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity tive body called the Group of Experts Saharan countries. He also has fac- reported in December that Tribert tories and transport companies in Rujugiro Ayabatwa, a tobacco ty- Dubai, and has stakes in banking, oil, coon who pleaded guilty to cigarette real estate, and construction compa- tax evasion charges in South Africa, nies across Africa. Rujugiro is also an has been funneling money to a Con- adviser to Rwandan president Paul golese rebel group that has commit- Kagame, according to the U.N. find- ted human rights violations including ings. recruitment of child soldiers, mass The Group of Experts has uncov- rape, and murders. ered a series of e-mails and indi- More than five million people viduals who claim that Rujugiro has have died in the Congo since 1998, been supporting the CNDP through making it among the most lethal cash payments and supplies, and conflicts since World War II. The that he pays the CNDP to allow the vast majority of fighting now occurs traffic of his untaxed cigarettes. in the east between three oppos- Rujugiro has denied the allegations ing forces: the Congolese military, of smuggling and CNDP ties in a a Hutu-backed rebel group, and post on his website and in a letter a Tutsi-backed rebel group called to a Rwandan newspaper. The Congres National Pour la De- Port authorities seized 97 mil- fense du Peuple (CNDP). Led by lion contraband Supermatch ciga- Laurent Nkunda, the CNDP has rettes in Ghana earlier this year, perpetuated serious human rights investigators say. The cigarettes abuses that include mass murder, were manufactured in the United torture, rape, forced recruitment of Arab Emirates, stamped with fake children, and slavery, according to “Sale in Ivory Coast” stamps, and the U.N.’s Group of Experts. destined for Mali, where they are Rujugiro owns Mastermind To- not licensed for sale. Supermatch, bacco Company, which produces Yes meanwhile, has become the most cigarettes, and Congo Tobacco Com- smuggled brand into Uganda. pany, which produces Supermatch Rujugiro’s South Africa opera- cigarettes, according to company fil- tion was shuttered in 2006, when ings. Rujugiro has cigarette factories the South African Revenue Service across central and eastern Africa, as froze the company’s assets and filed well as tobacco fields in many sub- fraud charges against him and his

3Artcl i e 13 of 194 Show Contents 5Pg a e 7 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity son. Rujugiro left the country and 52 people succeeded on a budget was arrested at Heathrow airport in of less than $15,000. Al-Qaeda’s London last fall. He settled the case entire 9/11 operation cost between this month before being extradited, $400,000 and $500,000, according agreeing to pay a $7 million fine and to the final report of the National to comply with tax laws in future. Commission on Terrorist Attacks Upon the United States. To end the flow of criminal money STANCHING THE FLOW to terrorist groups and insurgencies, At the core of the problem, say experts say, will mean cutting off scholars, are the high profits of the flow of contraband — whether tobacco smuggling, which rival narcotics or tobacco. Terrorism and those of narcotics, and the relative criminal finance investigator Larry cheapness of conducting a terrorist Johnson, with BERG Associates, operation. In many cigarette smug- notes that it’s much easier to crack gling cases, millions of dollars are down on the flow of legal products at stake. A shipping container con- like tobacco. “You need to ensure that taining 10 million cigarettes costs the products are being sold through as little as $100,000 to produce in legitimate channels through legiti- China, but can bring as much as $2 mate distributors — that they’re not million in the United States. Ciga- committing willful blindness,” he rette smuggling bolstered the en- says. “The contraband is fairly easy tire economy of Montenegro during to deal with because it’s in the power the 1990s. of the distributors and producers to Contrast that with the small control the process. This is actually amounts it takes to conduct a ter- one of those few problems that is fix- rorist attack. “Part of the problem able.” n is that it takes so little to finance an operation,” says Gary LaFree, Alain Lallemand and Aamir Latif director of the University of Mary- contributed to this story. land’s National Consortium for the Study of Terrorism and Responses to Terrorism. British authorities, for example, estimated the 2005 London subway bombing that killed

3Artcl i e 13 of 194 Show Contents 5Pg a e 8 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity The Taliban And Tobacco SuggledCm igarettes Give Boost To Pakistani Militants By Aamir Latif and Kate Willson Published Online | June 28, 2009

umma n Khan is a poor, these militant groups are on the U.S. aging farmer who tills an- most-wanted list in the region — Tother man’s land in the res- among them, Baitullah Mehsud, who tive northern tribal belt of Pakistan. has claimed responsibility for bloody For him and others in the Khyber attacks in Pakistan and has sworn to Agency region, Sahib Ayub Afridi is strike Washington, D.C. U.S. officials considered an angel. The illiterate have responded by putting a $5 mil- 70-year-old tribal leader finances lion price on Mehsud’s head. construction of water pumps, streets and lighting, builds mosques and ma- A TAX FOR TERRORISM drasahs, and supports the penniless and widowed. As government sanctions restrict But there’s another side to Afridi. traditional sources of terrorist fi- A one-time notorious drug king- nancing, Pakistani militant groups pin who in the 1980s armed the Af- increasingly rely on proceeds from ghan Mujahidin at the CIA’s behest, counterfeit cigarette production and Afridi churns out millions of coun- smuggling, intelligence sources say. terfeit cigarettes to smuggle across Although income figures are rough central Asia, China, and Africa, and estimates at best, profits from the splits the proceeds with the pro-Tal- illicit cigarette trade account for as iban militants who control the swath much as 20 percent of funding for of mountainous borderland, accord- these militant groups, second only to ing to Pakistani intelligence and cus- heroin production, according to ter- toms officials. The leaders of some of rorism experts in Pakistan. “Taliban

N W F P & FATA

PAKISTAN INDIA AFGHANISTAN

SWAT LOWER DIR BAJAUR Mingora SHANGLA BUNER

Peshawar

ORAKZAI Islamabad NORTH WAZIRISTAN

PAKISTAN

Taliban controlled Federally Administered Tribal Areas SOUTH 0 5 100 km North West WAZIRISTAN Frontier Province

and other militant groups do not “They simply receive taxes on a reg- have to do much,” says Ikram Sehgal, ular basis from owners of illegal and a senior defense and security analyst legal cigarette factories and later for who heads SMS Security, Pakistan’s the safe passage they provide to the leading private security company. convoys.”

3Artcl i e 14 of 194 Show Contents 5Pg a e 2 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity The Afridi case is part of a broader iban’s growing power is the role of trend of terrorism groups relying on tobacco smuggling. contraband to finance their activities, As U.S. and NATO forces attacked experts say. Even if efforts to cut the the Taliban in Afghanistan, the pre- region’s booming heroin production dominantly Pashtun fighters increas- are successful — an unlikely pros- ingly sought sanctuary along the un- pect — the lucrative tobacco trade governed border of Pakistan. The suggests how hard it will be to stanch Khyber Agency — a border province funding to terrorists and insurgents boasting the most-traveled trade in areas far from government control. route between the two countries The world’s longest-running civil wars — is also the hotbed of cigarette are fueled by contraband according to counterfeiting in Pakistan. And its a 2002 study by Stanford University’s renegade factories have become the James Fearon. Cocaine smuggling has region’s largest employer, according largely propelled FARC’s 40-year in- to Pakistani intelligence sources. surgency in Colombia. Diamonds have Fateh Mohammed, a senior Paki- funded civil wars in Sierra Leone and stani tax official, said counterfeit Angola. Opium has led to drawn-out cigarette production is on the rise, conflicts in Afghanistan and Burma. costing the government an estimat- In the badlands of the Afghan- ed $88 million annually in lost taxes. Pakistan border, the challenges are He said the excise department does particularly daunting. U.S. President what it can, but the factories are “out Barack Obama recently deemed the of reach.” region “the most dangerous place in “It’s hard for us to curb the sale the world” for Americans. The grow- and production of counterfeit ciga- ing power of the Taliban and other rettes as we neither have the man- militant groups, combined with new power and other resources to do waves of terrorism, has put Paki- that,” Mohammed said. “Nor do we stan’s weak government on the de- have any reach to the tribal belt fensive. The risks are indeed high: as where this business is flourishing.” much as two-thirds of the nuclear- Illicit cigarette production in the armed country is ruled not by a cen- strife-torn tribal belt, a semiautono- tral government but by insurgents, mous region of Pashtun tribes bor- militants, tribal leaders, or warlords. dering Afghanistan, accounts for an Overlooked in the Pakistani Tal- estimated 22 percent of all consump-

3Artcl i e 14 of 194 Show Contents 5Pg a e 3 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity tion in Pakistan, a country with ciga- story published in The Wall Street rette taxes among the highest in the Journal before his January 2002 ab- world — accounting for 87 percent duction, Daniel Pearl reported on of the cost per pack. Mohammad how the group “taxed” goods being Khosa, who heads the anti-counter- smuggled across the border. The feiting efforts for British American militants skimmed between $35 mil- Tobacco in the region, estimated that lion and $75 million off exports of the region’s factories pump out some Marlboro cigarettes, Sony TVs, and 15 billion cigarettes a year, a large Gillette shaving cream, Pearl wrote. portion of which end up smuggled to Today, no figure is more deeply neighboring Afghanistan. mired in the region’s contraband “Smuggling has long existed be- trade than Haji Ayub Afridi, a tribal cause of physical proximity to land leader of the region-ruling Afridi routes going into Central Asia and clan, which has long controlled trade beyond,” said Sumit Ganguly, profes- routes into Afghanistan and whose sor and Pakistan expert at Indiana name is synonymous with trade and University. “On top of that, there are transport throughout Pakistan. very poor people. The two dovetail very neatly.” WHO’S WHO OF MILITANTS Trade routes between Afghani- stan and Pakistan developed over Afridi’s sweeping luxury estate near thousands of years with no govern- the Afghan border is enclosed by 20- mental controls. It wasn’t until the foot high walls topped with concer- British drew a 1600-mile border be- tina wire, guarded by a private army tween the two countries, in 1893, and protected by an anti-aircraft that a culture of illicit trade flour- battery. Authorities point to a pair ished. Today, Pashtuns pay little at- of lucrative, yet nameless, cigarette tention to the poorly marked borders factories that Afridi owns, known lo- that separate the rugged terrain be- cally as “One More Cigarette,” and tween Afghanistan and Pakistan. to a number of cigarette-filled ware- Following the October 2001, U.S.- houses he is said to own near Pesha- led invasion of Afghanistan, smug- war — the region’s largest city, 25 gling contraband goods across to miles east of his home. Because most Pakistan provided the Taliban with a of his business is in the names of as- major source of financing. In his final sociates, the full extent of Afridi’s as-

3Artcl i e 14 of 194 Show Contents 5Pg a e 4 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity sets is unknown, but officials believe kidnapping for ransom. Early in his he operates as many as six factories. smuggling racket, Afridi refused to Afridi churns out copies of an cut Bagh a percentage of his pro- array of Western brands — Marlbo- ceeds, instead paying protection ros, Camels, Benson & Hedges, and taxes to a rival Taliban group, offi- 555s, among them, officials say. The cials say. The two groups clashed in Marlboros and Camels are smuggled 2008, leaving 19 dead. Following the into Afghanistan and the central battle, Afridi agreed to pay Bagh. Asian countries of Turkmenistan, Bagh may be the most moderate Uzbekistan and Tajikistan. Benson militant leader on Afridi’s payoff list. & Hedges is favored for shipment to Afridi also pays a pair of rival Taliban South Africa, while counterfeit 555s factions in the neighboring tribal re- are moved through the Khunjarab gion of Waziristan, along the Afghan pass into China. Afridi also produces border to the south, who are actively low-quality local brands One-Touch fighting U.S. and NATO troops in and Datchi, which are popular in Af- Afghanistan. One of the men, Mul- ghanistan. lah Nazir, opposes fighting against Afridi pays protection money to Pakistan security forces. But his ri- a Who’s Who of the region’s militant val, Baitullah Mehsud — leader of leaders, according to Pakistani intel- Pakistan’s Taliban movement — has ligence. In exchange for operating advocated attacks against the Paki- his factories in the Khyber Agency, stani government and is blamed by sources say, Afridi pays $36,000 a Islamabad for ordering the assassi- month — the average combined an- nation of Benazir Bhutto. nual income of 47 Pakistanis — to Mehsud’s troops also provide a Mangal Bagh, leader of the area’s rul- safe haven for al-Qaeda forces fighting pro-Taliban militia. ing in Afghanistan, and his militancy A former bus token taker and has made him a prime target for the fellow member of the Afridi clan, Americans. But that has not deterred warlord Bagh commands thousands the Taliban leader; he recently joined of heavily-armed Islamist militants forces with Nazir and a third warlord through his group Lashkar-i-Islam who, together, now control much of (Army of Islam). In addition to col- the region. The rival groups agreed lecting taxes from the likes of Afridi, to “fight the U.S. together, because the pro-Taliban group specializes in we are concerned over the surge in

3Artcl i e 14 of 194 Show Contents 5Pg a e 5 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity American troops in Afghanistan,” In the 1980s, Afridi is credited with Nazir told local tribal chiefs, accord- orchestrating the heroin trade being to the Daily Times, an English- tween eastern Afghanistan, through language newspaper in the region. the Khyber Pass, to the Afridi clan Afridi isn’t the only counterfeit in Pakistan. Pakistani and Belgian cigarette producer in the tribal belt. authorities first sought his arrest Smugglers also transport cigarettes in 1983, after tying the smuggler to from illegal factories in neighbor- 17 tons of hashish in a southwest ing provinces of Kohat and Bannu Pakistan warehouse and another 6.5 into Afghanistan through the bor- tons in Antwerp, Belgium. But when der town of Miramshah. The area 50 Pakistani police sought to arrest is in the grip of an al-Qaeda militia Afridi in 1990, they were met by an of ethnic Uzbeks loyal to Mehsud. armed militia and quickly retreated, Pakistani intelligence sources say according to U.S. court records. cigarette smugglers pay the militant Despite his record as a narcotics groups up to 20 percent commission trafficker, the CIA had its own uses for each convoy. American and Japa- for Afridi. In the 1980s, he was one of nese model trucks leave the sprawl- many Pashtun tribal leaders tapped ing, high-walls cigarette factories by the agency to help finance and almost daily, while bigger convoys arm the Mujahidin struggle against of five to seven trucks leave twice a the Soviet invasion of Afghanistan, week, local residents say. according to The New Dimension of International Terrorism by former Harvard University fellow and U.S. ON THE LAM Army Colonel Stefan M. Aubrey. Af- Afridi is no stranger to the black ter the Soviets pulled out of Afghani- market. During the 1960s he drove stan, Afridi turned his attention truckloads of smuggled gold through homeward. He was elected to Par- the Khyber Pass. His partner was a liament in 1990 — reportedly after slightly older gold smuggler named paying up to $600 per vote to rep- Iqbal Baig. The two prominent tribal resent the Federally Administered members would remain close busi- Tribal Areas. ness partners as they expanded into Through it all, Afridi never currency, hashish, and heroin smug- stopped dealing drugs, according to gling. U.S. court records. He ordered sub-

3Artcl i e 14 of 194 Show Contents 5Pg a e 6 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity ordinates to truck hashish to Kara- heroin into Vienna on Butt’s behalf chi in Bedford trucks and old tanker — died from a drug-filled balloon trucks. Meanwhile, he and his part- exploding in his stomach. The fac- ners made millions smuggling tons tory became “a social club of misfits, of heroin and hashish across the thugs, murderers and dope dealers,” globe — through India to London, said a New Delhi-based agent with Paris, and Amsterdam, packed amid the Drug Enforcement Administra- frozen fish into the Netherlands, tion. through Singapore and Hong Kong, By the 1990s, however, Afridi’s and across the Atlantic to the United criminal past was catching up with States and Canada. him. With authorities threatening Afridi, through his longstanding prosecution, he went into hiding and contacts in the drug world, became was soon splitting his time between the key supplier to the biggest nar- Pakistani tribal areas, Afghanistan, cotics ring in Pakistan, according to and the United Arab Emirates. the U.S. Drug Enforcement Admin- It was a trio of hash shipments — istration. The DEA branded Afridi’s 58 tons in all — that finally led to Af- syndicate “the single most prolific ridi’s undoing. heroin and hashish drug traffick- Hidden amid fish, tires and sacks ing organization in Pakistan.” The of rice, the drugs were sent to Long amounts were indeed impressive: Island, New York, and Newport 57 tons of hashish into the Nether- News, Virginia, and led to the ar- lands in a single shipment; 30 tons rest of one Stewart Newton, Afridi’s of hashish to California; and mas- U.S. connection. Arrested in 1988, sive amounts of heroin around the Newton was sentenced to 47 years world. in prison, but served only eight after At the center of the operation was agreeing to cooperate with prosecu- the notorious Iqbal Baig–a respect- tors in the case against the Pakistani ed, well-known businessman whose smugglers. Also indicted were Butt assets included cinemas, textile fac- and Baig, whom Pakistan extradited tories, commercial property, and a to the United States in 1995. pizzeria. And at Baig’s side was Tarik Afridi stayed out of reach, hid- Butt, his brother-in-law. Butt took ing in the tribal zone. But fearful over a battery manufacturing plant of arrest by Pakistani officials and in 1986 after its owner — smuggling concerned his now-arrested co-con-

3Artcl i e 14 of 194 Show Contents 5Pg a e 7 of 86 Tobacco Underground: Part One | Terrorists & Insurgents ©2009 Center for Public Integrity spirators would turn against him, he failed, they say, and the aging Afridi negotiated with the DEA for a year returned home. before finally turning himself in. It is back home, in the Khyber Now-retired DEA agent Gregory Agency, where Ayub Afridi has re- D. Lee recalls fielding odd questions focused his attentions. Gone are from Afridi’s go-between during that the hashish and heroin shipments, time. officials say. The old smuggler has “He would ask crazy questions found an easier racket to ply, with like, ‘how many times a day will I be few penalties and easy profits — the beaten by the Marshals?’ and ‘will I untaxed cigarette trade. Reached by be able to stay at the Waldorf Asto- telephone, in English and Urdu, an ria in Manhattan,” Lee said during a elderly man at Afridi’s home denied recent phone interview. If he wasn’t he was Afridi and declined to com- permitted to serve out his sentence ment further. at the four-star hotel, Afridi wanted Nor will others talk openly about to know if he could employ a person- Afridi in his native land. Journalists al cook at the prison. “He had no idea do not write about the man, and even what to expect.” law enforcement officials speak about In 1997, Afridi pleaded guilty him in hushed tones. But the poor of to smuggling hashish and was sen- the Khyber Agency are not so reti- tenced to five years in prison and a cent. Despite his years in Afghanistan, $100,000 fine. But the Pakistani god- in jails and throughout his smuggling father served only two years in U.S. exploits, Afridi didn’t forget the poor jail, paid just $425, and in 1999 he who surrounded him, farmer Tum- was deported to Pakistan, where of- man Khan told a visiting reporter. ficials promptly arrested him for an Even when Afridi was locked away in earlier smuggling case. an American prison cell, the poor and Although sentenced in Pakistan widowed continued to receive month- to seven years in prison, Afridi was ly checks on his behalf. released without explanation shortly “Haji Sahib is an angel for poor after 9/11. Soon after his release, people like us,” Khan said. “We don’t he traveled to Afghanistan to unite know much about his business, anti-Taliban warlords, according to whether legal or illegal. What we senior Pakistani intelligence and know is that he has helped us when anti-narcotics officials. His attempts no one was there to do that.” n

3Artcl i e 14 of 194 Show Contents 5Pg a e 8 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity The Montenegro Connection L baccoove, To , and the Mafia By Leo Sisti Published Online | June 01, 2009

ytt li le cat … I’m tapped by the Italian police for 20 going crazy without you months, are attached to hundreds ‘M…. You have repeatedly of thousands of court records filed betrayed me, I think …. Little cat, by the prosecutor’s office in Bari, in when are you coming? ... I love you, southern Italy. Here, in the Apulia little cat.” On Jan. 4, 2001, Dusanka region’s capital, facing Montenegro Pesic Jeknic, representative of the across the Adriatic Sea, prosecu- Montenegrin trade mission in Milan, tors Giuseppe Scelsi and Eugenia Italy, was speaking on the phone at Pontassuglia have at last wrapped her home in the southwest of the up their long-running investigation city. Milo Djukanovic, at that time of Djukanovic, Jeknic, and six other president of Montenegro, was call- Montenegrins and Serbs, as well ing from the capital Podgorica. Bil- as seven Italians allegedly tied to lions of people around the world organized crime. Their indictment had just hailed the New Millennium. charged the group with, among oth- Dusanka, nicknamed “Duska,” the er offenses, mafia association aimed beautiful 41-year-old widow of the at illicit trafficking of tobacco, a se- late foreign minister of Montene- rious crime in Italy. The indictment gro, was alone, far from her country. and an accompanying 409-page re- And she spoke out freely about ev- port by Italy’s anti-mafia unit, the erything: love, tobacco, and crime. DIA, which have not before been Eight years after Jeknic’s loving made public, provide an extraordi- conversation with her president, nary look inside what may be one of transcripts of her phone calls, wire- Europe’s biggest smuggling opera-

3Artcl i e 15 of 194 Show Contents 5Pg a e 1 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity tions in recent years — a tale of cor- Djukanovic is now prime minis- ruption, murdered witnesses, and a ter of that “Tortuga.” Re-elected in billion dollars in money laundered March, he leads a country where for through Swiss banks. nearly 17 of the past 18 years he has served as either prime minister or president. And he is pushing hard TORTUGA OF THE ADRIATIC for Montenegro to join the European At the center of this case is a hid- Union, which is now considering the den bit of history, say prosecutors, country’s membership. To that end of how tobacco smuggling became Djukanovic counts on his main sup- a state enterprise in Montenegro, porter, Italy’s premier Silvio Berlus- a Balkan republic in southeastern coni, who in March lauded him dur- Europe bordering Serbia and the ing a state-visit in Podgorica. Adriatic Sea. Home to just 600,000 Affiliated with Serbia until 2006, people, the country is smaller than Montenegro is now fully indepen- Israel and is known for its scenic dent, but some EU nations, nota- coastline. But it is also known for its bly Belgium and Germany, remain smuggling routes through the heart skeptical that the country is ready of the Balkans, which, during the to join the West. Djukanovic has breakup of the former Yugoslavia, said that the smuggling is a thing allowed organized crime to thrive. of the past, done, to earn cash dur- Italian authorities noted as much in ing a time of international sanctions the DIA report. “Montenegro, for a against the former Yugoslavia, and decade, was the real Tortuga of the that he did not personally profit Adriatic sea,” they wrote, compar- from the trade. Law enforcement ing the Balkan state to a Caribbean officials broadly agree that Mon- island notorious for its pirates. “A tenegro’s era of state-sponsored heaven for illicit trafficking; impu- smuggling is over. But the prime nity granted to mobsters … a place minister’s controversial history where authorities guaranteed the has dogged him for 15 years, and passage of illicitly traded goods.” whether he can convince the EU And investigators left no doubt who that he — and his government — they thought was behind the bil- have cleaned up Montenegro may lion-dollar racket: “Milo Djukanovic depend on what happens in Italian ruled this Tortuga.” and Swiss courts this summer.

3Artcl i e 15 of 194 Show Contents 5Pg a e 2 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity According to the Italian indict- dropped him from the indictment. ment, from 1994 to 2002, during Dju- Starting June 3, Bari Judge Rosa kanovic’s long tenure, Montenegro Calia Di Pinto will hold a prelimi- was a haven for cigarette smuggling nary hearing to decide whether or by two of Italy’s mafia syndicates: not the evidence gathered by pros- the Neapolitan mafia, known as the ecutors is enough to put the in- Camorra; and the crime family of the dicted on trial. The judge will hear Apulia region, in Italy’s boot heel — a story of a “mafia war” stretching the Sacra Corona Unita. Both syn- into 10 countries: not only Italy and dicates set up shop in Montenegro. Montenegro, but also Serbia, Croa- Almost every night dozens of pilots tia, Greece, Germany, Switzerland, steered a fleet of large speedboats Cyprus, the Netherlands, Liechten- crammed with cigarettes across stein, Aruba, and the United States. the Adriatic from the Montenegrin So far, two key witnesses and five port of Bar to the Italian city of Bari others mentioned in the case have and nearby. According to court re- been murdered. cords, during those eight years an extraordinary one billion cigarettes OPERATION MONTECRISTO per month — 100,000 cases — were smuggled out of Montenegro, most of In Switzerland, meanwhile, a sec- them Marlboro and Marlboro Light. ond trial has been underway since Once in Italy, the untaxed cigarettes early April, also bearing on the were sold by the mafia on the black Montenegro connection. Code- market. named “Montecristo,” after the The judicial papers originally classic book The Count of Mon- named 15 people. Among them: Dju- tecristo, the case stems from the kanovic himself; Dusanka Jeknic; a Swiss leg of an investigation started former Montenegrin finance minis- as an offshoot of the Bari prosecu- ter; managers of the Montenegrin tion. In what is reportedly the larg- company MTT, allegedly set up to est organized crime case ever in control the smuggling; reputed Bal- Swiss courts, authorities maintain kan and Italian mobsters; and a Ser- that over a decade — from the early bian businessman. In March, noting 1990s until 2001 — more than US$1 that Djukanovic is protected by billion from the tobacco smuggling diplomatic immunity, prosecutors were laundered by Italian organized

3Artcl i e 15 of 194 Show Contents 5Pg a e 3 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity crime. The mafia allegedly washed 2006 thesis for the London Busi- its dirty cash from Montenegro ness School. Knezevic reported through brokers and money chang- estimates “that by the end of [the] ers based in Lugano, Switzerland, 1990s, the Montenegrin govern- and deposited it in Swiss banks. ment was earning as much as $700 The trial of nine people, including million annually from the clandes- Swiss, Italians, a Frenchman, and tine cigarette trade.” Knezevic was a Spaniard, is expected to end in a teenage friend of Djukanovic, who June, with a possible ruling June 19 served as a witness at Knezevic’s in Bellinzona, just across the border wedding. But Knezevic now lives from Italy. in London and has had a falling out Both sets of hearings are sure to with the prime minister. He relates interest Brussels officials in charge that Djukanovic once told him that of EU enlargement, who are re- while Montenegro faced interna- viewing Montenegro’s bid for mem- tional economic sanctions in the bership. Djukanovic’s diplomatic 1990s, the country reaped $300 mil- immunity cannot stop the proceed- lion annually from the illicit trade ings from shedding light on a coun- in cigarettes and oil. Whatever the try that for years, critics say, has black market amount, law enforce- been governed outside the rule of ment officials are convinced the law. Today, law enforcement offi- contraband trade was a prime earn- cials believe Montenegro’s tobacco er of hard currency for Djukanovic’s smuggling has largely been replaced government, which slapped a so- with new routes from Russia, China, called “transit tax” on shipments by Poland, and Ukraine. But the years the smugglers. Knezevic described of black market activity, allegedly it as a stream of contraband cash presided over by Djukanovic him- “flowing into a parallel government self, raise uncomfortable questions budget, which was then used to about crime and corruption in Mon- support the official budget.” tenegro. This much is clear: Milo Dju- Ratko Knezevic, a long-time kanovic is a seasoned and savvy pol- Montenegro government insider itician. The son of a well-connected who once lobbied Washington on judge, he enrolled in the Yugoslav behalf of Djukanovic, described the Communist League while still in extent of the old smuggling in his high school. He later became secre-

3Artcl i e 15 of 194 Show Contents 5Pg a e 4 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity tary of the League of Communists of Montenegro had taken over the il- Montenegro and allied himself with licit trade, and was pouring billions Yugoslavia strongman Slobodan Mi- of untaxed smokes into Italy. losevic. Djukanovic’s own bid for One of the investigators sum- power succeeded in February 1991, moned by the Rome Parliament to when he was elected prime minister testify on Montenegro’s new role of Montenegro. He was only 29, and was the Bari prosecutor, Giuseppe at that time few people in the world Scelsi. He and other colleagues tes- had even heard of Montenegro. That tified that Montenegro was the main changed quickly with Yugoslavia’s operational base for smuggling in bloody collapse in 1991 and ’92, as the Mediterranean, a place where a Slovenia, Croatia, Bosnia Herze- great number of fugitive criminals govina and Macedonia all seceded. set up shop to trade cigarettes as Montenegro remained in a feder- well as drugs and arms. In the north, ated state with Serbia, and in 2006, they noted, the port of Zelenica was it became independent through a controlled by members of the Bari referendum. Through all this, Dju- and Naples mafia, while in the south kanovic dominated the political life the port of Bar was run by the mob of Montenegro, serving six terms as from Bari and Brindisi, another prime minister (1991-1998, 2003- Apulia town. The gangs in effect 2006, 2008-present) and one term operated their own navy — about as president (1998-2002). 70 speedboats — able to cross the Adriatic in a mere two hours. The lucrative trade was also a THE BARI INVESTIGATION bloody one. Wars between rival In 2001, a special commission set up mafia factions left more than a few by the Italian Parliament released a mobsters dead in both Italy and 130-page report focused on Mon- Montenegro, along with several tenegro and the mafia. For years, agents of the Guardia di Finanza, the mafia had moved mountains of the Italian tax and customs police. contraband cigarettes through the In Rome, the Parliament reacted ports and warehouses of Montene- quickly: just 13 days after releasing gro’s southern neighbor Albania, but its report on the mafia, it approved these had become unreliable due to a tough new law making tobacco the Balkan war. By the mid-1990s, smuggling a crime tied to mafia as-

3Artcl i e 15 of 194 Show Contents 5Pg a e 5 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity sociation with prison terms of up to includes a fascinating set of state- 15 years. Two years later — in 2003 ments made by mobsters from the — the prosecutor’s office in Naples Apulia “cartel”; smugglers turned aimed their sights at the very top, informants; the reputed “kingpin seeking to arrest Djukanovic him- of Swiss contraband”; Croatian self on “association of mafia-type” journalist Ivo Pukanic, editor of charges. The warrant, however, the Zagreb-based weekly Nacional, was initially rejected by a judge, on murdered in October 2008; and two the grounds that Djukanovic was Montenegrin officials. shielded by diplomatic immunity. The judge did grant a warrant for FOLLOWING THE MONEY the arrest of Duska Jeknic, but by then Djukanovic’s lover had already Italian investigators set out to follow fled Italy. the money behind the “Montenegro Prosecutors in Bari were also Connection” — where it went, who investigating the same case. With touched it, who laundered it, and authorities in both cities conduct- who owns it today. There was mon- ing investigations on Montenegro, ey for everybody, they found, in a often involving the same people, multi-billion-dollar business. Money in summer 2003 the Bari prosecu- for smugglers. Money for organized tor’s office was chosen as the sole crime. And, according to court re- investigative magistrate and the cords, money for Montenegrins in cases were merged. From that point high places. “Djukanovic, together on, Scelsi worked alone with the with his inner circle,” noted the Bari unit of the DIA, the anti-mafia DIA report, “had huge amounts of agency. He spent years collecting money illicitly earned and lodged testimony and documents, which he in Swiss, Monte Carlo and Cyprus requested from several countries, banks.” mainly tax havens, like Cyprus and Scelsi, the prosecutor, zeroed in Switzerland, as well as the Nether- on the man who allegedly master- lands, Croatia, Serbia, Slovenia, and minded the smuggling scheme with the United States. Montenegro authorities. He was The court records have been Franco Della Torre, a Swiss citizen sealed until now. The report pro- well known to Italian and U.S. of- duced by the DIA, in particular, ficials. Della Torre was implicated

3Artcl i e 15 of 194 Show Contents 5Pg a e 6 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity in laundering mafia money in the stored the tobacco before moving it notorious “Pizza Connection” case each night into the hands of Italian of the 1980s. The Pizza Connec- organized crime. tion had reunited the Sicilian mob Scelsi charges that Della Torre, with its American cousins, pouring on behalf of MTT, was entitled to im- a flood of heroin into America’s East port and store cigarettes, as well as Coast through pizzerias. It looked to to collect duties (the so-called “tran- Scelsi as if Della Torre was up to his sit tax”) from his four distributors. old tricks, but this time using not Della Torre then made payments drugs but tobacco. Swiss prosecu- to MTT from Santa Monica, work- tors agree and have indicted della ing through three Irish companies Torre as part of the Montecristo owned by MTT and an account with case. Authorities allege that della the Intercambi company, owned by Torre built a complex operation that a Swiss money changer. Under in- involves a 1996 deal he negotiated structions from Montenegro, Della using a Panamanian company, Santa Torre allegedly made payments to Monica, with an exclusive license to Zeta Trans and others, including transfer 100,000 cases per month of “Yugoslav politicians.” How much Philip Morris, British American To- money went to Zeta Trans? Accord- bacco, and R.J. Reynolds cigarettes. ing to testimony summarized in the Della Torre, Scelsi says, then sub- DIA report, the Italians paid US$63 contracted with four distributors: a case; $30 ended up on Zeta Trans Italian, French, and Spanish smug- accounts and the rest in private ac- glers. counts. Elsewhere, the report cites Della Torre’s de facto partner testimony that “part of the transit in Montenegro was allegedly MTT tax, at first three Deutsche marks (Montenegro Tabak Transit), a state per case … went onto the books of company set up to control smug- the National Security Service, with- gling operations and run by two of out any authorization, in violation of Djukanovic’s friends, according to Montenegro laws and regulations.” court records. MTT in turn was said Who was behind the smuggling to manage another Montenegrin scheme? Court records allege that company, Zeta Trans, which operat- Djukanovic himself was deeply im- ed a warehouse based in the Monte- plicated. Scelsi accused the Monte- negrin port of Bar, where smugglers negrin leader of “having promoted,

3Artcl i e 15 of 194 Show Contents 5Pg a e 7 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity run, set up, and participated in a carrying huge amounts of cash. In mafia-type association.” His investi- Lugano, mafia funds were depos- gators wrote: “Milo Djukanovic was ited in bank accounts of individu- absolutely aware of what was going als and brokerage companies …. on in Montenegro, as well as of the Thanks to exclusive licenses and repercussions on the Italian State the collection of transit taxes on and the other EU members. He was contraband cigarettes, Montenegro aware since he was involved in it rulers were presented with another and had a direct interest in it. He income stream and the possibility himself was conscious of the huge of obtaining profits from illicit traf- amount of money, in hard currency, ficking in cigarettes …. Starting in drawn from illicit tobacco trafficking the early 1990s until the beginning handled by Italian organized crime. of 2001, almost the whole flow of His greed for riches made him so funds stemming from Montenegro’s unprincipled that he fit in with the cigarette smuggling trade, managed association. He went so far as to as- by the Camorra and Sacra Corona sure protection to fugitives wanted Unita, went through the Swiss fi- in Italy, disregarding the most basic nancial market. During this time, legal norms. He did that through the more than one billion dollars were state security apparatus.” laundered.” The racket was, in effect, a giant Italian investigators have recon- ATM machine, producing as much structed what they say is the “mon- as $2 million each week. Court re- ey trail” behind the Montenegro cords from the Italian and Switzer- Connection. From 1997 to 2000 the land investigations suggest that the smugglers flew planeloads, literally, mafia’s profits from the trade were of banknotes in foreign currencies: cleaned up by Swiss money launder- 1.2 billion German Deutsche marks, ers. According to an indictment by 726,000 U.S. dollars, 136,000 Swiss Switzerland’s attorney general: Francs, and some 65,000 Austrian “Criminal funds of the Camorra Shillings. The man who allegedly and Sacra Corona Unita were infil- engineered all this was Stanko trated into the Swiss banking sys- “Cane” Subotic, a Serbian business- tem through Ticino-based money man close to Djukanovic. “Through changers. The money runners his company, Dulwich,” alleged Ital- crossed the border into Switzerland ian prosecutors, Subotic “laundered

3Artcl i e 15 of 194 Show Contents 5Pg a e 8 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity the proceeds of the criminal asso- the investigative report. Savino’s ciation. He assured the availability predecessor, Della Torre, was being of aircraft to transfer money from investigated in Bari and in Switzer- Montenegro, where the money ar- land. rived from Switzerland, to Cyprus.” Duska didn’t know that she was He used three airplanes, “one of being tailed and wiretapped by Ital- them bought with profits from Mon- ian agents. Two days later, news tenegro’s tobacco transit tax and broke that Della Torre had been ar- with Subotic’s own money,” and 15 rested. On the phone, according to couriers who flew 178 times from the investigative report, Duska and Montenegro to Cyprus, according to Savino worried that Djukanovic’s investigators. Once deposited in the role in issuing Della Torre’s ciga- Bank of Cyprus, some of the funds rette license could tie him to the were used to pay tobacco makers smuggling network, according (for example R.J.Reynolds, Austria to court records. Both allegedly Tabak Scandinavia, which later be- feared Della Torre could show that came Gallaher Sweden, and Seita, he was acting as a representative of the French maker of Gauloises). the Montenegro government. Worse But the bulk of it allegedly disap- news came the same evening, that peared in at least two obscure com- a reputed boss of the Sacra Corona panies with accounts in Liechten- Unita, known as the king of con- stein banks. traband in Montenegro, had been extradited to Italy after his arrest in Greece. He, too, could open his “I’M HOME, LITTLE CAT” mouth. At 10:13 pm on Feb. 24, 2001, Milo More bad news followed. In May Djukanovic made a phone call to his that year, the Croatian magazine lover Duska Jeknic, the Montene- Nacional published an interview grin business attaché in Milan, who with Sretko Kestner, a local tobacco had just turned 42. “Where are you, trader. Kestner was a former part- little cat?” Jeknic: “I’m home, little ner of Subotic, the man behind the cat.” She was accompanied by Paolo airlifted cash from Montenegro to Savino, an Italian living in Switzer- Cyprus, and he knew plenty. Dju- land, who had become the group’s kanovic, he told the world, was be- new cigarette broker, according to hind the Montenegro cigarette traf-

3Artcl i e 15 of 194 Show Contents 5Pg a e 9 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity ficking through MTT’s directors. ing a contraband kingpin and work- Scelsi’s DIA investigators ing for Djukanovic. According to searched Jeknic’s Milan apartment the Italian investigators, Bokan had in July 2003. By then Jeknic had been tied to tobacco smuggling in fled Italy, fearing the worst. But she Montenegro for some time. left behind a goldmine: personal Darko Raspopovic. A senior organizers, notes, and telephone member of the Montenegro police books with the numbers of Milo directorate, Raspopovic was shot Djukanovic, his brother Azo, and a dead on Jan. 8, 2001, in Podgorica. certain “Cane” — the nickname of He had run investigations into white suspected smuggling mastermind collar crime and in 2000 was nearly Stanko Subotic. Also among the assassinated when a bomb blew up notes: the codes of two airplanes his car. used to channel black cash into Cy- Baja Sekulic. A former bodyguard prus, with “Cane” written aside it and aide to “Cane” Subotic, he was with a Greek phone number and the murdered on May 30, 2001, in Bud- name of a courier. va, Montenegro, on the Adriatic coast. Orazio Porro, murdered on A DEADLY TRAIL March 25, 2009. Porro, arrested in The Montenegro Connection is sur- 1998 in Montenegro, where he was rounded by murder. Investigators one of the bosses of the cigarette have been struck by the large num- traffic, became an informant and for ber of people linked to the “Monte- a time was in a witness protection negro Connection” who have met program. untimely deaths in recent years: Zugic, Bokan, Raspopovic, and Goran Zugic, security advisor Sekulic were mentioned in the Bari to then-President Djukanovic, was investigation but were never sum- shot and killed on May 31, 2000. moned by Scelsi’s team. The case Vladimir Bokan. A Serbian busi- is different for two other key mur- nessman murdered in Athens on dered witnesses, both of them jour- Oct. 7, 2000. During the 1980s, Bo- nalists: kan owned retail shops, including Dusko Jovanovic. Editor of Dan, a Belgrade boutique where “Cane” a pro-Milosevic Montenegrin daily Subotic was a tailor before becom- newspaper, he was gunned down

3Artcl i e 15 of 194 Show Contents 5Pg a e 10 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity on May 27, 2004, while getting in Simonovic also confirmed the roles his Peugeot 406. His newspaper had of MTT and Zeta Trans, the Monte- reported stories first broken by the negrin companies allegedly tied to weekly Croatian magazine Nacional. the smuggling. And the committee, Through his investigators, Scelsi he said, had questioned Djukanovic approached Jovanovic and asked if about three Swiss bank accounts al- would testify in the Italian investi- legedly tied to him, with some $3.2 gation. Jovanovic agreed but never million, mentioned in an article pub- made it to Bari. lished by Pukanic’s Nacional. Dju- Ivo Pukanic. Editor of Nacional, kanovic denied everything. he was questioned by Scelsi on July Djukanovic has denied every- 18, 2002. But “Puki,” his nickname, thing in Italy, as well, and he has will never get to the witness stand. declined to comment on this report. He was murdered on Oct. 23, 2008, In March 2008, he agreed to submit killed by a car bomb in Zagreb, near to questioning by Scelsi and an- Nacional’s offices. His deposition, other magistrate in Bari. After more however, can be used in court, and than six hours, Djukanovic left the prosecutors found his statements court. Outside, his Naples attorney an invaluable starting point in trac- told the press how as prime minis- ing the money out of Montenegro to ter, Djukanovic could have refused Cyprus . to answer the court’s questions, but Another important witness ques- that he had in fact asked to be questioned by Italian investigators is tioned. “A year ago Prime Minister Vuksan Simonovic, a Socialist Peo- Djukanovic had asked to be interro- ple’s Party representative in the gated to clear up all the lies told by Montenegrin Parliament. Simonovic people who, obviously, love neither chaired a Montenegro parliamen- Italy nor Montenegro,” the attor- tary committee set up in 2001 to ney explained. “Now everything has investigate the tobacco smuggling been cleared up.” allegations. According to Simo- Well, not quite. That will be up to novic, the Bar port authority reaped judges in Italy and Switzerland this $7 million in five years, from 1996 year, who will be looking at the law, to 2001, from cigarette smuggling, a decade of smuggled cigarettes and just by loading and unloading to- laundered money, and the legacy of bacco from ships to warehouses. a certain prime minister. n

3Artcl i e 15 of 194 Show Contents 5Pg a e 11 of 116 Tobacco Underground: Part Two ©2009 Center for Public Integrity Djukanovic’s Montenegro A Family Business A mberships EU Me Looms, So Do Troubling Questions By Miranda Patrucic, Mirsad Brkic, and Svjetlana Celic Published Online | June 01, 2009

o ntenegrins may nalists say this is just another ex- have been surprised late ample of the government’s interests Mlast year to learn that the aligning with the financial interests global financial crisis had arrived in of the first family. They say their their tiny Balkan country. Newspa- small country — fewer than 700,000 pers, the Internet, and even a James people in less space than the U.S. Bond film painted Montenegro as state of Connecticut — seems at the Monte Carlo of Eastern Europe. times like the private corporation The nation’s mountainous, tree- of the prime minister and his fam- lined coast, medieval walled cities, ily. With Djukanovic’s political party and stone ruins set the scene for a handily winning elections at the end boom in luxury hotels and private of March, the prime minister is ex- villas. pected to remain in power for anoth- In December, the administration er two years. of Prime Minister Milo Djukanovic “Montenegro is a lawless coun- announced that Montenegro would try,” charges Milka Tadic, editor bail out First Bank (Prva banka), of the country’s influential Moni- one of the country’s largest financial tor magazine. “And if you are part institutions and a major investor in of the government or close to its the Montenegrin boom. First Bank circles you can do whatever you is majority owned by Djukanovic, want.” two siblings, and a close friend. Djukanovic has amassed a level Members of local watchdog of wealth that is hard to explain groups, opposition parties, and jour- given his meager government sal-

3Artcl i e 16 of 194 Show Contents 5Pg a e 1 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity ary over the years. Some believe his est independent newspaper, and its wealth stems from his days in the publisher Zeljko Ivanovic, who was tobacco smuggling business. Italian badly beaten and had suggested prosecutors place the prime min- that Djukanovic and his family were ister at the center of a conspiracy behind the attack. When the Croa- by Montenegrin officials and the tian weekly Nacional published an Italian Mafia that allegedly smug- unflattering article in 2001, Dju- gled huge quantities of cigarettes kanovic countered by suing not for about 10 years starting in the only that publication, but also me- 1990s, although prosecutors did not dia outlets that reprinted the story, specifically allege that Djukanovic according to Reporters Without profited personally from smuggling. Borders. Allegations of corruption are attracting interest outside Montene- FAMILY OF MILLIONAIRES gro these days, as the country is making a bid to join the European In 1991, on the day he turned 29, Union. Although the EU is satisfied Milo Djukanovic came to power, the Montenegro is making progress, EU youngest prime minister in Europe. Enlargement Commissioner Olli Shortly after, Yugoslavia split apart Rehn told a Montenegrin television in war. Djukanovic was one of a station in December that corrup- trio of Montenegrin leaders at the tion and organized crime are the time, led by then-President Momir primary obstacles to the country Bulatovic, a close ally of Serbian joining the EU. strongman Slobodan Milosevic. In Djukanovic declined to comment 1991 and 1992, Montenegro drew for this story, and has said little be- international outrage for shelling yond cursory denials when various Dubrovnik — a UNESCO heritage allegations of wrongdoing have sur- site — in neighboring Croatia. Eth- faced over the years. Instead he has nically targeted Bosnian Muslims vigorously confronted his accusers who sought refuge in Montenegro in court, filing and winning defama- were deported back into Bosnian tion lawsuits against media in his Serb-held areas, a fact Montene- homeland, Serbia, and Croatia. Last gro has acknowledged in recent year he won a €20,000 judgment years by awarding compensation against Vijesti, the country’s larg- to survivors. In 1992, for example,

3Artcl i e 16 of 194 Show Contents 5Pg a e 2 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity some 80 Bosnians were sent back; Whatever the source of his some of them were kept in prison wealth, Milo Djukanovic today is a camps, but most were later execut- rich man. Reporters for the Interna- ed. Opposition parties unsuccess- tional Consortium of Investigative fully called for an investigation into Reporters (ICIJ) found that he owns whether Djukanovic should be tried or controls properties and company for war crimes. shares worth at least US$14.7 mil- Djukanovic dominated politi- lion. That stands in contrast to Dju- cal life in Montenegro. Except for kanovic’s government salary, which 16 months he has never topped $1,700 per month. During the spent in Parlia- Djukanovic’s income declaration war years, ment, he has forms, dating back to 2005, do not Montenegro served continu- list earnings from other sources. relied on ously since 1991 His wife Lidija earns a salary slight- cigarette as prime minis- ly higher than his, according to the ter or president. most recent filing. smuggling As president, Other members of the Dju- revenue to keep he became the kanovic family also fare well finan- the country darling of the cially. Djukanovic’s brother Alek- afloat. West when he sandar (known as “Aco”), a concert turned his back promoter before the Balkans war, on Milosevic. After Milosevic’s 2000 has accumulated at least $167 mil- defeat in Serbia, Djukanovic began lion, according to an ICIJ estimate a national push for independence of his assets. His sister Ana, a high- from Serbia. His efforts succeeded profile lawyer, has more than $3.5 in 2006. million worth of stocks and real es- During the war years, Montene- tate. And the prime minister’s son gro relied on cigarette smuggling Blazo, a university student, earns revenue to keep the country afloat. about $15,000 monthly leasing an Bulatovic and Djukanovic have ad- office that was a gift from his uncle. mitted that smuggling helped fill “What is obvious is that Mr. Dju- government coffers, but maintain kanovic and a number of govern- that they never personally benefit- ment officials amassed enormous ed from the trade, which they say riches during the 1990s, and now complied with Montenegrin laws. with that money they are unabash-

3Artcl i e 16 of 194 Show Contents 5Pg a e 3 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity edly buying Montenegrin compa- and two government agencies, had nies,” said Alexander Damjonovic, to be sold to one bidder, the rules a member of Parliament for the stated, and they set a minimum ac- opposition Socialist People’s Party ceptable price, about $3 million, for of Montenegro (SNP). “They are the package. Only one bid came in. investing money in the capital mar- It was from Monte Nova, a company kets. They are buying real estate.” owned by Djukanovic’s brother Aco. How the family accumulated its Monte Nova, which already wealth is not clear. Critics say the owned 12 percent of the bank, Djukanovics made a series of lucra- didn’t actually pay even the mini- tive business deals, and that the mum asking price. It covered about prime minister has been involved in half of its bid in cash and the rest repeated conflicts of interests. The in bonds of old foreign exchange privatization of a bank in his home- funds, a form of payment that the town of Niksic is the prime exam- council’s unusual rules for the bank ple, they say, of how Djukanovic’s deal allowed. The bonds could be family makes these business deals bought at the time for a fraction of bear fruit. their face value. After the purchase, the name was changed to First Bank and its THE NIKSIC BANK GOES headquarters were moved to the PRIVATE capital, Podgorica. Monte Nova ap- In 2006, the Niksic Bank was slated pointed four of the seven members for privatization, and Djukanovic of the board, effectively taking con- was deeply involved. As prime trol of the bank. A corporate disclo- minister he established a council sure filed with the stock exchange to oversee the transfer of public showed that over the next two companies into private hands, and years, the board approved a series he appointed himself president of of recapitalizations, issuing addi- that council. The council set up tional stock that was sold again at a odd rules for the bank privatization minimal price of $187 per share (the by which a 30 percent stake in the market price ranged between $250 bank would be sold on the Monte- and $1500). Djukanovic, through negrin stock exchange. The shares, his company Capital Invest, bought held by the Republic of Montenegro nearly seven percent of the low-

3Artcl i e 16 of 194 Show Contents 5Pg a e 4 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity priced shares with a $2 million loan the Montenegrin government and from the London office of Piraeus agencies, various municipalities, Bank of Greece. Djukanovic used and state companies had $23 mil- the stock that he was buying as col- lion in the bank, according to bank lateral. Ana Kolarevic, Djukanovic’s audits. By the end of 2007, govern- sister, bought what is now a 0.5 per- ment deposits totaled $127 million. cent share of the bank. Overall deposits soared from more Aco Djukanovic’s shares jumped than $104 million in 2006 to more 100-fold in value and by September than $579 million in 2007, making 2008 were worth it one of Montenegro’s most impor- Within one more than $141 tant banks overnight. year of the million. The Djukanovic’s government an- purchase of his prime minister’s nounced in December that due to first shares, investment had the international financial crisis, Djukanovic grown to nearly the government would bail out the repaid a $2 $8.7 million by family’s bank. First Bank showed a then, while sis- profit of $5.8 million for the nine million loan ter Kolarevic’s months ending September 2008, with stock that shares increased but end of the year figures just three was worth four to about $1.6 months later revealed a loss of $35 times what he million. (Their million. Djukanovic’s government paid for it. current value helped with a loan of $64.7 million may be differ- and by paying off some $19 million ent, but no shares have publicly in loans the bank had given to state traded since then.) companies or companies working Within one year of the purchase on state projects. By March, the of his first shares, Djukanovic repaid bank had paid back $14.5 million of the loan with stock that was worth the loan. four times what he paid for it. Auditors found that while under Immediately after the Djukanovic the family’s control, the bank regu- family invested in the bank, the larly loaned to insiders and connect- amount of assets deposited there by ed parties. For example, in 2007, governmental bodies skyrocketed. Aco Djukanovic borrowed more than At the end of 2006, about the time $2 million and Milo Djukanovic’s Monte Nova took over the board, business partner, Vuk Rajkovic, bor-

3Artcl i e 16 of 194 Show Contents 5Pg a e 5 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity rowed $856,500. Stanko Subotic, a the NGO Sector (MANS), a Monte- friend of Djukanovic who is under negrin nonprofit watchdog group, indictment in Serbia on charges of complained to the state Commis- tobacco smuggling, took out a loan sion for Determining Conflict of from the bank to buy nearly $33 mil- Interest in 2006, asking it to sus- lion of land on exclusive St. Nikola pend Djukanovic and several other Island, a resort property so stunning ministers from membership in the it is known as “Hawaii.” He never re- privatization council. MANS argued paid the loans and the bank is liqui- that the Montenegrin Constitution dating his properties. prohibits government officials from Aco Djukanovic and his sister performing other duties. The com- Ana Kolarevic declined to commission, appointed by the assembly ment. “I would gladly talk about controlled by Djukanovic’s party, everything else, but not about First disagreed, finding that the board Bank,” said Kolarevic. “I’m a small was a government body and Dju- stakeholder, with a very, very small kanovic could serve in any govern- percentage. … I’m not authorized mental function he wanted. to talk about it.” Ranka Carapic, Montenegro’s chief CONFLICTS OF INTEREST? state prosecutor, issued a statement in January saying that the Central In the fall of 2006 Djukanovic with- Bank suspected that First Bank’s drew from the top level of govern- management had “taken illegal ac- ment in favor of serving as a mem- tions” that had endangered deposi- ber of Parliament. Montenegro’s tors’ accounts. Prosecutors and Cen- independence, he said, represented tral Bank officials refused to provide the achievement of his major politi- ICIJ with details about the alleged cal goal and it was time to dedicate irregularities. Meanwhile, press ac- himself to business. counts quoted depositors who com- Over the next two years, he opened plained that the bank took three five companies. Three are still active, weeks to honor wire requests. The including Capital Invest, a consulting case is being investigated by the and management firm that owns his Montenegrin Special Department for shares in First Bank. He co-founded Combating Organized Crime. and owns one-quarter interest in a The Network for Affirmation of firm that operates the University of

3Artcl i e 16 of 194 Show Contents 5Pg a e 6 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity Donja Gorica, a four-acre, 4,500-stu- cial Bank for more than $1.7 million dent private institution in Podgorica at about $636 per share, according to that his son Blazo attends. He also co- bank records. He sold them the next founded Global Montenegro, a tour- year to OTP Bank of Hungary, which ism consulting and management firm, bought out all shareholders for a pre- which owns acreage along the coast mium of about $3,767 per share — in the tourist town of Budva, accord- leaving Aco a six-fold return on his ing to Montenegrin corporate regis- investment. tration records. Djukanovic’s sister, Ana Ko- A large part of The wealthi- larevic, owns four apartments in the growth has est members of downtown Podgorica. A former su- been due to an the Djukanovic preme court justice appointed dur- influx of capital family are the ing Djukanovic’s tenure, Kolarevic from Russian prime minister’s specializes in business law. She brother and owns a legal firm and Edu Cons, a businessmen, sister. Accord- consulting and management com- some of them ing to Monte- pany. Her 25-year-old son Edin is clients of the negrin property also an entrepreneur who owns and prime minister’s records, Aco operates three design, consulting, sister. Djukanovic or and building firms. his firms own The first family’s heavy invest- at least 22 business properties and ment in tourism and coastal devel- four apartments, several in down- opment is another conflict of inter- town Podgorica and, along the est for Djukanovic, say local critics, coast, and an acre in tourist haven given the government’s strong Herceg Novi. Montenegrin corpo- backing of development. Property rate registration records show he on the Montenegrin shoreline has closed Monte Nova but still co-owns risen in value dramatically over the two construction companies, Urbis past four years before pulling back Nova and Invest Nova, which are in- this year, and the government has volved in coastal real estate devel- stated a desire to turn Montenegro opment. into an upscale resort area. A large Aco Djukanovic has a knack for part of the growth has been due to making money. In 2005, he bought an influx of capital from Russian shares of the Montenegrin Commer- businessmen, some of them clients

3Artcl i e 16 of 194 Show Contents 5Pg a e 7 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity of the prime minister’s sister. sit on the board of an independent In July 2008, Parliament, con- public institution. But such matters trolled by Djukanovic’s party, passed are never that simple in Montene- a law declaring five-star hotels to be gro. Another body, the Djukanovic- in the national interest of Monte- friendly Commission for Determin- negro. The law allows these private ing Conflicts of Interest, ruled that companies to confiscate surrounding the prime minister’s membership land using eminent domain. The new was not a conflict because he re- law also loosens the rules for large ceives no pay. developments and can even force Djukanovic has so far ignored small landowners to give up land to the constitutional court’s deci- neighbors with bigger lots and hous- sion and still holds his position. In es. At the same time, Montenegro 2008 when Djukanovic, prompted has embarked on an international, by the sudden illness of his suc- state-funded advertising campaign cessor, moved back into the top to lure upscale tourists to the coun- level of government, he promised try. to distance himself from his private The Djukanovic government has enterprises. “As long as I am in a also moved to make the prime minis- state function I don’t want to do ter the president of the board of the business,” Djukanovic was quoted Montenegrin Investment Promotion as saying in Vijesti, the Montene- Agency. The position allows him to grin daily. But the prime minister control and negotiate foreign invest- has not acted quickly on that prom- ment deals. Djukanovic has traveled ise. Records show that Djukanovic extensively to Russia and last year to recently re-registered three of his Dubai looking for investment along firms, which will keep them operat- Montenegro’s coastline. ing through at least 2010. n In 2006, MANS, the watchdog group, again complained about the prime minister, arguing to the Con- stitutional Court that Djukanovic’s seat on the investment board was a conflict of interest. This time MANS won, with the court ruling it uncon- stitutional for the prime minister to

3Artcl i e 16 of 194 Show Contents 5Pg a e 8 of 86 Tobacco Underground: Part Two ©2009 Center for Public Integrity B lame The Distributor HwGllahero a Stayed in the Smuggling Game By Drew Sullivan and Paul Radu Published Online | October 19, 2008

n 2004, Cyprus-based tobacco Tlais agreed to unload tens of mil- distributor Tlais Enterprises lions of moldy cigarettes by mixing ILimited (TEL) was told it had them with new cigarettes and selling received a “red card” from British them overseas. If anyone deserved a customs, a warning that the company red card, Tlais felt, it was Gallaher for was suspected of cigarette smuggling. coming up with the plan. TEL’s owner, Ptolomeos Tlais, Yet just a few months later, in Jan- was surprised. Born in Lebanon to a uary 2005, Gallaher told Tlais that it wealthy trading family, Tlais was do- could no longer send his company ing, he said, exactly what his suppli- cigarettes because he was involved er, Gallaher Tobacco, had told him to in smuggling. Each sued the other in do: quickly dumping large amounts the U.K. for breach of contract, with of cigarettes onto developing coun- Gallaher claiming it was still owed tries. Everyone involved, he insists, $3.2 million for cigarettes purchased knew that some of these smokes — and Tlais seeking $675 million in lost especially their low-end Sovereign profits and other damages. Tlais is brand — would find their way back also pursuing Gallaher — now owned to the U.K., where avoidance of high by Japan Tobacco International — in tobacco taxes guaranteed smugglers his native Lebanon, where a criminal a windfall. court case is about to begin against In fact, Tlais had even signed a three Gallaher managers and Gallaher unique deal with both Gallaher — the itself for fraud. In addition, Tlais has U.K.’s largest cigarette manufacturer sued U.K. customs in Cyprus for alleg- — and the U.K. customs service, edly assisting in smuggling, misrepre- giving them unprecedented access sentation, and damaging his reputa- to his shipping records. In the deal, tion, a case that started this month.

3Artcl i e 17 of 194 Show Contents 5Pg a e 1 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity These actions, borne of pique, have billions of cigarettes in markets where opened a crack in the usually insular they could not possibly hope to sell community of tobacco manufacturers them legally; that Gallaher dealt with and distributors. From the U.K. law- companies known to be smugglers suit have come some 13,000 internal while publicly speaking out against documents on the inner workings of the practice; that the company sold Gallaher and Tlais, revealing how a cigarettes through duty-free channels major tobacco company got others to meant for airports and border shops, do its dirty work, and how customs knowing that those cigarettes often officials shrugged this off. Not since ended up in the hands of organized litigation during the 1990s forced mil- crime; that Gallaher sold substandard lions of documents out of the tobacco cigarettes that were expired, dam- industry has such an inside look been aged, and moldy to developing coun- available at the seamy underside of a tries such as Iran and war-torn Iraq; major cigarette company. and that the U.K. customs service, Tlais’s dealings with Gallaher date rather than being a barrier to smug- from 2000 and continued through gling, was complicit as long as the 2005 — a time of major upheaval in U.K.-made cigarettes went to other the tobacco industry, when it came countries. under heavy pressure around the Gallaher has denied any impropri- world for contributing to smuggling. ety. Last April, in fact, the company The smuggling by Big Tobacco is prevailed in its U.K. legal dispute with widely thought to have subsided TEL when Judge Christopher Clarke since a series of press exposés in ruled that Gallaher had sufficient 2000-01 helped prompt government cause to cancel its contract with the crackdowns and billion-dollar settle- distributor, and had, in fact, attempt- ments. But the Tlais case suggests ed to clean up its record on smug- that, at least in the case of Gallaher, gling. Indeed, the judge fingered TEL, the smuggling continued for years, not Gallaher, for indiscriminately sell- and indeed was business as usual. ing cigarettes to known smugglers. Tlais and his co-workers today Judge Clarke, however, did not let make a litany of charges against Gal- Gallaher off the hook. In his 326-page laher. Among the claims: that TEL ruling, he took the company to task was made the scapegoat for practices for its past involvement in smuggling, by Gallaher which included dumping and noted that the company’s later

3Artcl i e 17 of 194 Show Contents 5Pg a e 2 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity practices “gave rise to a risk of smug- in charge of the trade. Norman Jack, a gling” — including Gallaher’s supply- longtime Gallaher insider, stated in an ing of a distributor without “any due affidavit in the Lebanon case that the diligence,” goods that “were shipped company set up a smuggling system to Cyprus and not to their ultimate using distributors to shield the com- destination,” and export of cigarette pany and give it deniability. packs with health warnings only in English, not in local languages. GALLAHER’S RESCUE PLAN Gallaher did not respond to ICIJ’s request for an interview. Gallaher’s problems date to 1998, Documents released during the when, like other big tobacco firms, the various legal disputes, as well as in- company was reaping huge rewards terviews with industry insiders, simi- from selling cigarettes that routinely larly depict an unseemly record for ended up on black markets abroad. Gallaher. Among Gallaher’s critics is Gallaher and U.K.-based Imperial, for Heiko Arjes, a veteran tobacco busi- example, were selling so many ciga- nessman and brand integrity consul- rettes to Andorra, a small European tant who worked with Gallaher and principality in the Pyrenees moun- Philip Morris in the Middle East and tains between France and Spain, that Africa. Arjes stated in a deposition every man, woman, and child would for the U.K. case that Gallaher was have had to smoke seven packs a day deeply implicated in the “transit” and to account for the trade. “duty not paid” cigarette trade — Gallaher’s attitude at the time was longstanding industry euphemisms summed up by Peter Wilson, then its for smuggling, according to the court chairman and chief executive, who ruling and various industry records. told the BBC: “We will sell legally to “My direct experience with Gallaher,” our distributors. . . . If those distribu- Arjes stated, “confirmed that they tors subsequently sell those products were still more interested in pursuing on to other people who are going to transit, non-duty-paid business than illegally bring them back into this the other manufacturers who had country, that is something totally out- cleaned up their act.” side our control.” Tlais’s allegations are also support- Despite the big profits, 1998 ed, in part, by an unlikely source: a turned into a rough year for Gallaher, top Gallaher manager who said he was according to trial records. Across the

3Artcl i e 17 of 194 Show Contents 5Pg a e 3 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity EU, as borders disappeared, so did In his statement, Jack said he the duty free shops that ran a brisk prepared a presentation for the Gal- business in tax-free cigarettes. Tax- laher board explaining how this was es on cigarettes — especially in the to be done, clearly pointing out that U.K., its home market — had soared, the procedures would involve “trad- leading to decreased sales. Then the ing and transit” — the industry code company sales in Russia, its largest for smuggling. Jack felt he needed to foreign market, nosedived after the protect himself and communicated ruble was devalued. regularly with top management be- At the same time, Gallaher had cause “we were all aware that we just upgraded a plant in Northern were embarking on business that Ireland with new high-speed ciga- was potentially extremely risky.” To rette-making equipment that would avoid prosecution, Jack said he was allow the company to benefit from told not to put anything in writing, large-scale production. But the drop to avoid knowing too much about in sales threatened the plant’s profit- where cigarettes were destined, and ability if it could not be kept operat- to avoid meetings on the topic. ing near capacity. “By following this course of ac- In response, Gallaher officials tion,” Jack stated, “we could never embarked on a bold plan to dramati- be accused of conspiring to smuggle cally bolster their sales worldwide. . . . and it was always possible to To implement the strategy, Gallaher deny knowledge of everything and brought in Jack, a trusted, long-time blame the distributor.” manager, in the spring of 1999. Jack, according to his sworn statement in DUBIOUS DISTRIBUTORS Tlais’s lawsuit in Lebanon, was asked to flood markets in developing coun- To help distribute the cigarettes, tries with Gallaher brands — to “sell Jack signed up Namelex, a Cyprus- billions rather than millions.” Jack based company run by a former Gal- said the strategy was directly over- laher executive. Tlais was an investor seen by Gallaher chief executive in Namelex and would fund a large Wilson himself. There was no plan number of the company’s tobacco to support the brands with advertis- sales, according to court records. ing as is customary in opening new Business at first was great. Over markets. time, Gallaher shipped tens of billions

3Artcl i e 17 of 194 Show Contents 5Pg a e 4 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity of cigarettes to Namelex’s warehous- more than 11,000 cases (110 million es in Cyprus and Dubai. cigarettes) of Gallaher’s Sovereign But among Namelex’s staff was and Mayfair brands, most of which a British manager named Michael had been sold or traded to CT To- Clarke (no relation to Judge Clarke, bacco by Namelex. British and Greek who heard the Tlais case in London). law enforcement reportedly sus- Namelex’s Clarke began to wonder if pected the cargo was to be diverted the plan they were following was le- in Latvia to a paper company run by gal. He asked Jack, who told him to a former KGB officer from Kazakh- follow the same rules he was using, stan and then smuggled into the U.K. according to Jack’s statement. The The ship, according to press reports idea was to look the other way and at the time, attempted to ram Greek avoid asking questions. customs boats. Under Namelex, there seemed to One month after the Marina was be no shortage of suspicious ship- seized, Namelex sold 65,000 more ments. U.K. customs would later say cases to CT Tobacco for export to a hefty amount of the company’s ciga- Albania, according to testimony and rettes were eventually smuggled back Namelex records. Albania, then a into the U.K. smuggling haven, seemed an odd From 2000 to 2002, Namelex also choice for such a shipment, as no sold Gallaher cigarettes to an array of market existed there for Mayfair and questionable distributors, including Sovereign brands. Jack and Clarke, a Cypriot-based company named CT according to the U.K. judgment, “dis- Tobacco owned by one Christos Tor- cussed the risk of diversion in the narides. A playboy scion of a wealthy, light of Mr. Tornarides’ reputation, politically-connected family, Torna- [and] that senior members of the [Gal- rides had worked extensively with laher] board . . . were very pleased Imperial and had a reputation for di- with the deal which should proceed verting cigarettes, the U.K. court de- immediately.” cision said. Gallaher cigarettes were even Namelex and CT Tobacco got into sold to Iraq and to the regime of Sad- trouble right from the start. In August dam Hussein, then under U.N. sanc- 2000, the “Marina,” a Cambodian-reg- tions. In an interview, Clarke said istered ship, was stopped by Greek he and Jack did business with Hus- authorities near Crete, packed with sein’s sadistic son Uday on his yacht

3Artcl i e 17 of 194 Show Contents 5Pg a e 5 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity in Baghdad, just months before U.S. real time information on seizures of troops invaded (although he said he Gallaher brands, so that TEL could and Jack believed their actions were avoid smugglers. Perhaps more im- legal at the time). portantly, customs also “acknowledged” Gallaher and Tlais’s plan to dispose of their mountain of aging MOLDY CIGARETTES cigarettes: They would mix the old In 2001, U.K. customs officials issued stock into batches of new cigarettes a red card to Namelex, and Gallaher — for export. used the action as a basis for cancel- “If you look at the industry, it’s ling its contract with the company. unheard of to mix old goods with Despite Tlais’s close ties to Namel- new goods,” said Clarke, the former ex, Gallaher replaced the distribu- Namelex manager who by then had tor with TEL, Tlais’s own company. gone to work for Tlais. “If you’re im- TEL agreed to sign a new contract porting old goods through duty paid and take over vast quantities of Gal- (channels), you can’t get away with laher cigarettes waiting to be sold by it.” Namelex — more than 400,000 cases But as long as the old smokes of them, or 4 billion cigarettes in all. stayed away from British shores, ap- The cigarettes ranged in age from 9 parently U.K. customs officials were months to two years old, well past the satisfied. It was an extraordinary expiration date, according to Tlais. deal. The expired cigarettes had no They had been stored in warehouses legitimate market overseas, said to- in Dubai and Cyprus, and some of bacco experts. They lacked fresh- the packs were discolored and the ness certificates required in many cigarettes themselves were molding. countries, their English-only warn- Mold in tobacco, if smoked, can add ing labels were not allowed in many to cigarettes’ harmful effect. countries, and they lacked proper The solution was an unusual tax stamps. agreement signed in 2002 between U.K. customs did not respond to U.K. customs, Gallaher, and TEL. In questions from ICIJ on the agreement it, Tlais agreed to provide documen- or any matter. tation of future shipments to Galla- Distributors soon began complain- her and U.K. customs, and customs ing about the moldy cigarettes Tlais officials agreed to supply TEL with was pushing, and a shipment to Iran

3Artcl i e 17 of 194 Show Contents 5Pg a e 6 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity was turned back. Tlais repeatedly time,” Espin testified. “I would not warned Gallaher that the cigarettes want to be smoking moldy cigarettes. were garbage and unsellable, but [But] if I did not have a cigarette at Gallaher continued to insist the ciga- all, then I probably would be quite rettes be sold. Tlais said he even paid happy to smoke a moldy cigarette. . . . for destruction of the Iranian ship- I do not think that is necessarily bad, ment and asked Gallaher to destroy that they are sold into Iraq.” more of the old stock. Tlais, who now expresses remorse While acknowledging the problem, over the deal, sees it differently. “Gal- Gallaher officials still insisted that laher was poisoning people,” he said. much of it be sold by mixing it with “I shouldn’t have allowed myself to fresh stock, according to Gallaher re- sell the cigarettes. I didn’t sell them cords. A handwritten note on the in- because I wanted to, but because I spection report is clear about what to had a [U.K. customs] agreement.” do next: “Sell [to] Iraq.” Michael Clarke said the implications “These goods in the condition that of the deal should have been obvi- they have been since the first inspec- ous. “Everyone knew [the old goods] tion can never be sold in a duty-paid would be smuggled,” Clarke said. “If market without problems,” Tlais you’re selling moldy meat, you’re go- wrote to Gallaher chief executive Ni- ing to sell it to dodgy people.” gel Northridge in 2004 after almost two years of trying to sell the bad GETTING RED-CARDED cigarettes. “Gallaher has placed me in a very bad position by following their As Tlais worked on unloading Gal- instructions to sell against my own laher’s moldy cigarettes, the smug- advice.” gling game was changing. Gallaher Gallaher defended the company’s and other cigarette companies were actions in testimony in the U.K. cases under growing pressure by authori- by Nigel Espin, then a Gallaher man- ties to clean up their act. Still, TEL ager. “I would see a market like Iraq, proved just as ineffective as Namelex which was just opening up after the at keeping goods out of the U.K., ac- release of sanctions or the relief of cording to the U.K. court summary. sanctions, would be a more suitable TEL used a Dubai-based com- market to sell these into rather than pany as its major distributor. The a more sophisticated market at that goods were soon diverted to Africa

3Artcl i e 17 of 194 Show Contents 5Pg a e 7 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity and across Eastern Europe, including the old cigarettes wherever they ing to smuggling havens in Latvia, could and he rarely received infor- Ukraine, and Montenegro. When mation from customs to help him U.K. customs officials asked to see avoid known smugglers. He claimed documentation, Gallaher said much he repeatedly warned Gallaher of the company’s papers were either about other companies, but said missing, incomplete, or suspected officials there were not only unin- by Gallaher of being forged, accord- terested but had originally brought ing to the judge’s summary. him some of the distributors who Tlais and Clarke dispute this, but later got him into trouble. Tlais’s reputation was beginning to TEL was finally red-carded by suffer. There was evidence that CT U.K. customs in 2004. Gallaher Tobacco and other companies given cancelled its agreement with the red cards were still getting supplies company, citing TEL’s red card, its of cigarettes indirectly through poor documentation, its closeness TEL. to distributors suspected of smug- By 2004, three out of every four gling, and its failure to investigate genuine cigarettes seized by U.K. seizures. Gallaher brought suit in customs were made by Gallaher — British court and, furious over the and Tlais was a prime suspect. In his betrayal, Tlais countersued. ruling against Tlais, Judge Clarke Gallaher’s contract with TEL al- found it likely that “well over 50 lowed it to break their contract if percent of the cigarettes supplied TEL received a red card. But red to TEL ended up being smuggled.” cards are unusual administrative Tlais disputes the judge’s as- actions — a kind of blacklist with no sumptions, but it was clear that TEL formal hearing or appeal process. was becoming a liability to Gallaher. Tlais has never seen the documen- “Gallaher never trusted me,” Tlais tation of his company’s red card and now recalls. “I kept asking, ‘Do you cannot verify that it even exists. In want to work with me?’ and they fact, customs makes the documents said, ‘Yes we do.’” available only to U.K. manufactur- Tlais said he tried to clean up his ers, and bases the information pri- business — that TEL stopped work- marily on seizures and the opinions ing with five suspect distributors, of manufacturers themselves. To but that his distributors were dump- Tlais, this is far too chummy a rela-

3Artcl i e 17 of 194 Show Contents 5Pg a e 8 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity tionship and speaks to a “blame the pan Tobacco International (JTI), a distributor” system that allows big $50 billion behemoth half-owned by companies to escape accountability. the Japanese government. In De- “Gallaher should have been red- cember 2007, OLAF and JTI struck carded, not me,” he said. “They a deal to avoid litigation by the Eu- made me sell this [expletive] under ropean Commission and its member their agreement and then they com- states over smuggling. To atone for plain about smuggling.” Gallaher’s past, JTI agreed to pay a €400 million fine. JTI, for its part, promised to clean up the mess it “THE WHOLE CONVERSATION” had inherited. In exchange, JTI got Tlais’s own problems continued. His a two-year moratorium on enforce- company soon attracted the atten- ment of smuggling statutes against tion of investigators of the Euro- Gallaher. pean Anti-Fraud Office (OLAF), an Tlais said the whole episode cost arm of the European Commission. him a heavy price both in terms of In 2005, he was charged with smug- money and trauma to his family. Ev- gling in Greece after an OLAF inves- eryone involved, he said, ultimately tigation found that transit cigarettes lost. Gallaher’s point man on smug- sold by Tlais for Bulgaria were in- gling, Norman Jack, was considered stead being sold off in Greece. Tlais by some managers to be “too close was considered an accessory to the to Tlais,” according to the court’s crime because he had sold the ciga- judgment, and eventually left Gal- rettes to known smugglers. At first laher. Most of the Gallaher execu- convicted and sentenced to four tives, meanwhile, have been re- years in prison, Tlais won on appeal placed by JTI. and the case was dismissed. Michael Clarke, the Namelex Tlais fared less well in British manager, is still out of a job. Clarke, court, when, in April, Judge Clarke for his part, thinks there is plenty ruled that the company was within of blame to go around, from the du- the law when it cancelled the TEL bious distributors to Gallaher and contract over concerns about smug- the U.K. customs service. “They al- gling. ways say it’s the distributor’s fault,” As for Gallaher, the 150-year-old he reflected, “but you don’t see the company was bought in 2007 by Ja- whole conversation.” n

3Artcl i e 17 of 194 Show Contents 5Pg a e 9 of 96 Tobacco Underground: Part Two ©2009 Center for Public Integrity H ow To Get Away With Smuggling CnadaBlliona ’s i -Dollar Deal for Big Tobacco By William Marsden Published Online | October 19, 2008

he investigations had the ministerial regulations.” gone on for so long that most Imperial Tobacco, maker of 16 TCanadians probably wrote cigarette brands including Cana- them off as another victory for big da’s top sellers Players and du Mau- corporations. rier, agreed to pay US$582 million. Then suddenly on July 31, after Rothmans, parent of Rothmans, a year of secret negotiations, Cana- Benson & Hedges Inc. and maker da’s two largest tobacco companies of 16 cigarette brands, agreed to — Imperial Tobacco Canada and US$534 million. Rothmans Inc. — pleaded guilty to Key to the settlement was the aiding and abetting tobacco smug- government’s readiness to release gling from 1989 to 1994, defrauding all former and present executives, Canadian governments of more than employees, directors and officers a billion dollars in unpaid taxes. from civil or criminal prosecution. The two companies agreed to Also released were the compa- pay an unprecedented C$1.15 bil- nies’ foreign owners and affiliates. lion (US$1.12 billion) to Canadian Tobacco bosses who oversaw the governments and to plead to one smuggling could now live out their count of “aiding persons to sell or retirements without fear they might be in possession of tobacco prod- be interrupted by a spell in prison. ucts manufactured in Canada that It wasn’t an idle fear. Two former were not packaged and were not executives with Canada’s third larg- stamped in conformity with the Ex- est tobacco company, RJR Mac- cise Act and its amendments and donald, have been convicted. One

3Artcl i e 18 of 194 Show Contents 5Pg a e 1 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity served four years in jail. Six others Canada was contraband. After the are awaiting trial or procedures that Canadian government doubled to- could eventually send them to trial. bacco taxes in 1991, Imperial alone The settlement has left RJR out earned annually C$600 million to in the cold. The company, now C$700 million in net profits “lubri- called JTI Macdonald after its 2000 cating” the smuggling through its purchase by Japan Tobacco, faces supply of cigarettes, according to about $10 billion in claims from Paul Finlayson, a former executive various Canadian governments. with Imperial’s holding company That figure was not lost on Roth- Imasco Inc. mans. Pressure to settle came from Because of Philip Morris International, which The Imperial the nature of in May 2008 offered to buy out settlement smuggling and the shares in Rothmans it did not “is chump its fluctuating already control. A stipulation of change. It’s market, it’s diffi- Philip Morris’s C$2 billion offer was cult to calculate the settlement of all outstanding li- just peanuts. precisely how abilities. This included the ongoing It means much revenue investigation by the Canadians into nothing.” Canadian gov- the company’s smuggling activities. — Paul Finlayson ernments lost to The Canadian settlement rivals tobacco smug- a 2004 settlement in which Philip gling during this period or exactly Morris agreed to pay the European how much of the smuggling was Commission US$1.25 billion over 12 aided and abetted by Big Tobacco. years. In return, the Commission The federal government is said to agreed to drop smuggling-related have lost at least C$3 billion from litigation against the company. 1990 to February 1994, according Even though the fines and pen- to a study by the Canadian anti- alties set records in the annals of smoking group, the Non-Smokers’ Canadian white-collar crime, they Rights Association. But this is a were a pale reflection of the stag- conservative estimate given the gering amounts that smugglers had C$10-billion claim against JTI Mac- defrauded governments during the donald. As former executive Finlay- early 1990s, when as many as one son said of the Imperial settlement: in every three cigarettes sold in “This is chump change. We used to

3Artcl i e 18 of 194 Show Contents 5Pg a e 2 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity spend C$50 million on a sponsor- vied for market share while hoping ship. It’s nothing. It’s just peanuts. that their cigarettes would not be It means nothing.” featured in front photos of major Government officials refused to police seizures. Corporate docu- comment on the settlement other ments in the public record show than to note that it was a record Imperial and Rothman executives penalty, agreed to by all sides. In intentionally exported enormous reality, the government likely had amounts of brand named cigarettes very little choice but to settle for a into the United States so they could relatively small amount, since Can- be smuggled back into Canada to ada’s three major manufacturers supply the black market. had successfully used their global Finlayson recalled that after reach to insulate their assets from the Royal Canadian Mounted Po- seizure. lice (RCMP) raided Imperial To- Corporate and court records bacco’s head office in Montreal in show that over the last 10 years, November 2004, they contacted the companies sold off or trans- him because his name was on some ferred assets, rendering them out critical documents. “Don [Brown, of reach to Canadian tax collectors. president of Imperial] should have By the time Canadian governments ordered that stuff destroyed,” he got around to pursuing Big Tobac- said. “I mean that should have been co, the companies were little more for your eyes only. . . It was not ever than shells with rights to a few intended to be stored or kept after popular tobacco brands, owned by presentation.” offshore companies. This reduced One of those documents, he add- government leverage to the threat ed, was a planning document for of criminal prosecution and the sei- exporting Imperial brands into the zure of future revenues. United States to be sold to smugglers. Finlayson said he drew up the plan: “They [the police] could CHUMP CHANGE have walked in and just handcuffed For years there has been little everybody at Imperial. But the gov- doubt about the involvement of Im- ernment did not have the guts of a perial and Rothmans in smuggling field mouse to go after the execu- when the companies vigorously tives of the company.”

3Artcl i e 18 of 194 Show Contents 5Pg a e 3 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity Imperial’s role in the illicit Ca- officials failed to take timely action nadian market is detailed in docu- to seize or freeze assets before they ments publicly available at the were sold off or shifted offshore. Guildford Depository near London, Ottawa has never explained its tar- England (an archive of 6 million to diness. 7 million British American Tobacco The result greatly played to the Company pa- advantage of Imperial and its ex- “The police pers that result- ecutives, who obtained large com- could’ve ed from U.S. liti- pensation packages when Imperial’s walked in and gation against assets were sold. In the end, Impe- handcuffed the industry). rial’s C$600 million settlement only Imperial, the marginally benefited the taxpayer, everybody record shows, who remains the ultimate victim of at Imperial set up distribu- what may have ended up as a multi- Tobacco. But tion networks to billion-dollar crime. the government smugglers as far Consider this: At the height of didn’t have the afield as Florida the smuggling, Imperial, Rothmans, guts of a field and Louisiana. and RJR were selling an estimated In a memo dat- 10 billion cigarettes a year into the mouse.” ed June 3, 1993, illicit market, or about 20 percent of — Paul Finlayson, for example, Im- their total production. This means former Imasco perial Tobacco that the three companies were sup- executive president Don plying at least 66 percent of the Brown told a illicit market. This amounted to a BAT executive that “until the smug- tax loss for Canadian governments gling issue is resolved, an increas- of more than $1 billion during the ing volume of our domestic sales peak year in 1993. in Canada will be exported, then The companies, meanwhile, smuggled back for sale here.” made out like bandits. Finlayson The evidence was overwhelming. said that while Imperial obtained Why, then, did the government set- its full manufacturer’s price in ad- tle for “chump change”? It was pub- vance of shipments, its costs were lic knowledge by at least 1997 that lower in the illicit market because Big Tobacco was involved in supply- it didn’t have to pay promotional ing smugglers. Yet federal revenue costs to retailers.

3Artcl i e 18 of 194 Show Contents 5Pg a e 4 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity THE SCRAMBLE TO DIVEST The company and its Canadian executive Les Thompson managed a When the smuggling finally ended in smuggling network that stretched February 1994 — after the govern- from a Canadian manufacturing ment caved in to industry demands plant in Puerto Rico to Aruba, then by reducing taxes to pre-smuggling onto Buffalo, NY, and into Canada. levels — Imperial was probably the Northern Brands and RJ Reyn- most exposed of the big three. Its olds pleaded guilty and were fined holding company, Imasco Inc. (Im- US$15 million. Les Thompson in perial and Associated Companies), 2000 was sentenced to four years in owned a multibillion-dollar string prison. of high-profit companies that could When both Canada and its prov- theoretically be seized for payment inces pummeled JTI Macdonald of back taxes, interest, and penal- with tax claims, the company filed ties. These assets included a trust for protection under Canada’s bank- company, a drug store chain, fast ruptcy laws. food restaurants, an insurance com- JTI Macdonald, however, was far pany, and a real estate developer. from insolvent. Over the past four Initially, Imperial and Imasco ex- years it had transferred more than ecutives didn’t believe the govern- $100 million in dividends to its par- ment would take action against big ent company JT Canada LLC II Inc., tobacco. “We didn’t think the gov- of Halifax, Nova Scotia, which is ernment would have the balls to owned by JT Canada LLC Inc., which come after us,” Finlayson said. News in turn is owned by JT International reports in 1997, however, indicated Holding B.V. of the Netherlands. that both the U.S. and the Canadian Japan Tobacco had carried out a governments were investigating to- series of transactions that its audi- bacco companies for their part in the tors, Deloitte & Touche, admitted early 1990s smuggling. were designed to make it difficult if By 1997, U.S. authorities were not impossible for governments to chasing RJR Macdonald’s parent attack its assets, according to the company RJ Reynolds Tobacco, Canadian government’s statement which in 1992 had set up North- of claim against RJR. The company ern Brands International, based had transferred in 1999 assets to in Winston-Salem, North Carolina. a network of firms that ultimately

3Artcl i e 18 of 194 Show Contents 5Pg a e 5 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity lead offshore to companies based in percent market share and an annual the Netherlands, Switzerland, and production of more than 900 billion the British Virgin Islands and which cigarettes. BAT then sold off the are owned by Japan Tobacco, ac- Canadian Rothmans in compliance cording to the court filings. with an order under the Canadian The company also created a sort Competition Act. of circle of debt, burdening its as- Imperial Tobacco moved its sets with $2.24 billion in debts to manufacturing to Mexico and was related companies using the trade reduced to little more than a shell marks as collateral. Both the fed- in Canada with a head office in eral and Quebec governments Montreal. Its only real assets were have petitioned the court to have Canada’s two most popular ciga- these transactions reversed, claim- rette brands, Players and du Mau- ing they were designed to “reduce rier, which were owned by another the value of its assets and to try company, BAT. to fraudulently shelter its shares” Imperial executives, some of against seizure. whom were directly implicated in At the same time, Imperial’s the smuggling, according to com- holding company, Imasco, also be- pany documents, earned more than gan divesting itself of its assets C$39 million in cash compensa- and moving the proceeds offshore. tion plus stock options as a result It auctioned all of its non-tobacco of these sales. Imperial President assets for more than C$11 billion. Don Brown, for instance, got C$2.5 British American Tobacco, which al- million in addition to his 100,000 in ready owned 42 percent of Imasco, shares worth C$4.2 million. used the proceeds to buy out the 58 Imasco’s proxy statement on percent held by the public — leav- the BAT buyout made no mention ing BAT, through its subsidiary BAT of smuggling, tax liability, or pos- Acquisitionco, with 100 percent sible police investigations into the ownership of the only company left activities of Imperial or Imasco ex- standing, Imperial Tobacco. ecutives relating to the smuggling. This occurred after BAT merged The circular’s stated reason for the with Rothmans International in sale of Imasco assets was that BAT 1999 to become the world’s second wanted to restrict its operations to largest tobacco company, with a 16 tobacco.

3Artcl i e 18 of 194 Show Contents 5Pg a e 6 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity Rothmans had reason for con- same — a tiny 5-mile section of the cern, as well. The RCMP notified St. Lawrence river near Cornwall, the company in 2002 that it was Ontario, where the Akwesasne In- under criminal investigation for dian Reservation straddles the U.S.- smuggling-related charges. Secret Canada border. The billions of brand negotiations for a settlement be- named cigarettes that Big Tobacco gan in 2007 after the RCMP and helped push through this funnel in federal and provincial prosecutors the early ‘90s no longer are in the informed Rothmans that they were game. But with “contemplating laying charges.” The government’s taxes back up With Rothmans ready to plead to 1990 lev- guilty, Imperial followed suit, since crackdown hasn’t els, dozens of both companies employed identi- affected the flow small, unli- cal structures to feed the smug- of smuggled censed com- gling networks. The amount of the cigarettes. Today, panies have settlements, parts of which will be it’s just a new set sprung up on paid over 15 years, did not seem to of players reaping the reserva- harm the companies’ bottom lines. tion. They are On July 31, the day of the public an- the profits. making vast nouncement of the settlement, Im- numbers of il- perial executives called a meeting licit cigarettes with impunity. of head office employees to assure Today, those reaping huge profits them that despite the settlement it off the smuggling are no longer the would not affect salaries or bonus- executives of cigarette companies, es, one source said. but renegade firms with distributors that range from biker gangs to the Italian Mafia. Even as Big Tobacco FILLING BIG TOBACCO’S pays a billion-dollar settlement to SHOES the citizens of Canada, the wealth Ironically, the belated crackdown that once flowed into its hands is has not affected the flood of smug- now staying with organized crime. gled cigarettes pouring into Cana- But that is another story. n da, which, in fact, has grown larger since the government’s case began. The major route remains largely the

Editor’s Note: During 2000 and series, from its first stories in 2001, a team of reporters from the 2000 on industry involvement in International Consortium of In- smuggling to the exposés of 2001 vestigative Journalists broke a se- revealing big tobacco’s collusion ries of landmark stories exposing with Colombian drug cartels, the how leading tobacco companies Italian Mafia, and North Ameri- worked with criminal networks can motorcycle gangs, can be to smuggle cigarettes around found online at http://projects. the world. Relying on interviews publicintegrity.org/Content. with insiders and thousands of aspx?context=article&id=351. internal industry documents, the unique team — based in six countries — pieced together how hen Tommy Chui smuggling played a key role in failed to show up at the big tobacco’s strategy to boost Wgrand opening of his wife’s sales and increase market share. new boutique in downtown Singa- Those revelations, and others that pore, alarm bells rang 1,600 miles followed, helped prompt lawsuits away in the offices of Hong Kong’s and government inquiries, and Independent Commission Against led to promises of a global crack- Corruption. It was March 29, 1995, down on the illegal trade in to- and the news that Chui was miss- bacco. ing devastated the commission’s The series was reprinted or assistant director, Tony Godfrey. written about in more than 40 He immediately sent two investiga- publications in 10 countries, in- tors to Singapore. Three days later, cluding Australia, Brazil, Colom- on April 1, his worst fears were re- bia, Denmark, the U.K., and the alized. Dockworkers found Chui’s United States. The complete ICIJ bloated body floating in Singapore

3Artcl i e 19 of 194 Show Contents 5Pg a e 1 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity Harbor. A former director of Brit- from an isolated instance. ish American Tobacco’s biggest dis- Tobacco manufacturers have of- tributor of contraband cigarettes to ten blamed the international smug- China and Taiwan, the 38-year-old gling of their products on organized Chui had been abducted, ritually crime. But a year-long investigation tortured, gagged, suffocated, and by the Center for Public Integrity thrown into the harbor just weeks shows that tobacco company offi- before he was to testify against his cials at BAT, Philip Morris, and R.J. ex-associates. Chui was the star Reynolds have worked closely with prosecution witness in an interna- companies and individuals directly tional tobacco smuggling investi- connected to organized crime in gation launched in 1993 by Hong Hong Kong, Canada, Colombia, Italy, Kong’s Independent Commission and the United States. In fact, one Against Corruption. He was about to Italian government report obtained blow the lid off a $1.2 billion smug- by the Center states that Philip Mor- gling operation to China and Taiwan ris and R.J. Reynolds licensed agents and implicate three former British in Switzerland were high-level crim- American Tobacco executives in a inals who ran a vast smuggling op- HK$100 million bribery scandal. In eration into Italy in the 1980s that addition, his testimony was key to was directly linked to the Sicilian the prosecution of his two former Mafia. Corporate documents, court business associates, several corrupt records, and internal government customs officers, and various mem- reports — some going back to the bers of Asia’s most notorious crimi- 1970s — also show that BAT, Philip nal gang, the Triad. Morris, and R.J. Reynolds have or- The case of Chui and the massive chestrated smuggling networks vari- BAT-fed smuggling network into ously in Canada, Colombia, China, China reveals the dark underbelly Southeast Asia, Europe, the Middle of a billion-dollar business fed by East, Africa, and the United States international corporations and oper- as a major part of their marketing ated by organized crime. While it is strategy to increase profits. The among the more sensational exam- corporate documents refer to this ples of corporate tobacco’s implica- black market business as “duty not tion in international smuggling and paid,” “parallel” markets, “general its links to organized crime, it is far trade,” or “transit.” But these same

3Artcl i e 19 of 194 Show Contents 5Pg a e 2 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity documents often clearly delineate realizing that tobacco is a good thing between this aspect of the business to get into, as you make just as much and legal trade. For example, one money, and it’s perhaps not quite as BAT official, in a 1989 letter to asso- anti-social,” Douglas Tweddle, the ciates in Taiwan, said, “With regard outgoing director for compliance to the definition of transit, it is es- and facilitation at the World Cus- sentially the illegal import of brands toms Organization in Brussels, told from Hong Kong, Singapore, Japan, the Center. “The public generally etc., upon which no duty has been aren’t against you if you’re selling paid.” smuggled cigarettes; in fact, they The companies have sought to rather appreciate you. And if you undercut rising government taxes, get caught, in virtually all countries, which studies show are the main the penalties for smuggling tobacco reason most smokers quit, as well are a great deal less than smuggling as to gain market share on their heroin or cocaine.” In the United competitors or on government-con- States, cigarette imports have risen trolled tobacco monopolies by of- so dramatically that investigators fering competitively priced popular are looking into whether the coun- international brands on the black try is being used as a way station in market. The result has been tax eva- the global smuggling trade. “Profits sion on a global scale that has great- from cigarette smuggling rival those ly depleted government treasuries, of narcotic trafficking,” then-U.S. especially in Third World countries. Customs Commissioner Raymond Cigarette smuggling has also fos- Kelly told Congress last year. “The tered international crime and mon- United States plays an important ey laundering and alarmed growing role as a source and transshipment numbers of law enforcement offi- country.” cials worldwide. Attracted by huge The investigation by the Center’s profits, quick turnovers, a captive International Consortium of Investi- market, and relatively light penalties gative Journalists is based on a re- if caught, organized crime now con- view of thousands of pages of cor- trols large sectors of the smuggling. porate and government documents “Organized criminals, who have and dozens of interviews with law traditionally been involved in smug- enforcement officials, smugglers, gling illicit narcotics, are suddenly and other sources worldwide. It in-

3Artcl i e 19 of 194 Show Contents 5Pg a e 3 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity dicates that tobacco smuggling is in- employ the same routes and distrib- creasingly dominated — often with utors. Russian and Italian mafia use the knowledge and consent of the Cyprus and Montenegro. The drug tobacco companies — by a hand- cartels and U.S. mafia use Aruba and ful of criminal organizations that in Panama. The same names turn up some cases have links to organized in smuggling networks into Colom- crime. The Italian Mafia in Western bia, Canada, and Europe. In South- Europe, East European gangs, Tri- east Asia, the same distributors who ads in Asia, drug cartels in Colom- smuggle out of Hong Kong to China bia, and motorcycle gangs and the also control distribution out of the American mafia in North America Philippines and Singapore. The Cen- all have become entrenched in the ter investigation shows that the man- game. Licensed distributors for the ufacturers funnel massive amounts manufacturers feed these organized of their brand name cigarettes into crime syndicates billions of ciga- these smuggling networks, often em- rettes worldwide, often with corpo- ploying circuitous routes in an ap- rate knowledge. “A primary driving parent attempt to shield themselves force behind the proliferation of cig- from accusations of wrongdoing. Dis- arette smuggling in both Colombia tributors and manufacturers work and Europe is the need of narcot- hand-in-hand to feed this market. ics traffickers, Colombian, Russian, But, in some cases, the manu- and others, to launder enormous facturers have worked directly with amounts of money that can no lon- organized crime figures. In Colom- ger be laundered through banks,” bia, tobacco companies are alleged said one recent court filing in a ciga- to have helped launder drug money rette smuggling case. and to have worked closely with distributors who are involved in drug trafficking. A Colombian lawsuit Telackh b market trade against Philip Morris and BAT ac- It’s estimated that about one in ev- cuses them of involvement in drug- ery three cigarettes exported world- money laundering through what is wide is sold on the black market. known as the “black market peso This enormous business is operated exchange,” a circuitous system by through a web of offshore companies which drug dollars are laundered for and banking institutions that often clean pesos through the purchase

3Artcl i e 19 of 194 Show Contents 5Pg a e 4 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity and importation of such goods as return for selling to preferred crimi- cigarettes and alcohol. In a federal nal syndicates, according to court civil racketeering lawsuit launched records and sources. in 2000, Colombia’s governors ac- The Center investigation also cused tobacco company executives shows that when senior or mid-level of illegally entering the country to executives have been charged crimi- organize smuggling networks and nally with aiding and abetting smug- retrieve cash payments, which were gling, tobacco companies often don’t then smuggled out for deposit in cooperate with investigators. In a offshore banks. Company employ- Louisiana case, for example, lawyers ees are also alleged in the lawsuit for one tobacco company used their to have bribed border guards. And connections in the administration their agents have been implicated in of former President Bill Clinton to illegal cash campaign contributions force the removal of a prosecutor to Colombia’s former president Er- pursuing a Brown & Williamson sales nesto Samper. executive for smuggling into Cana- In Italy, court cases and police da. The major tobacco companies and government reports reveal an all vigorously deny any involvement intricate web of Mafia families that in the smuggling of their products. through bribery, intimidation, and In a statement to the Center, BAT murder control the smuggling of bil- also said it knew of no evidence “to lions of Philip Morris and R.J. Reyn- substantiate allegations that some of olds cigarettes into Europe through our employees or distributors have Cyprus, Albania, and Montenegro. In worked with criminal organisations Spain, at least one major distributor and/or organised crime.” Compa- for RJR is allegedly a black market nies such as BAT have stated that distributor linked to illegal drug traf- they can’t be expected to keep track ficking. In Canada, RJR sales execu- of their 90,000 employees, even tives dealt directly with smugglers though in many cases those named linked to the American and Cana- in smuggling are senior managers. dian mafia. In some cases, tobacco The companies also argue that they industry executives actively played sell a legal product to wholesalers various gangs off against each other over whom they exercise no con- and solicited and received millions trol. Kenneth Clarke, BAT’s deputy of dollars in kickbacks or bribes in chairman and the former Conser-

3Artcl i e 19 of 194 Show Contents 5Pg a e 5 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity vative chancellor of the exchequer, no longer to refer to it as transit, told the British House of Commons DNP, or GT. The new company term health select committee on Febru- is “WDF” for “Wholesale Duty Free.” ary 16, 2000, that “there is no evi- The executives also discussed tak- dence I have ever seen that BAT is ing steps to counter any civil and pe- a participant in this smuggling. We nal actions that could threaten the seek to minimize it and avoid it.” company’s survival, the source said. However, writing in the February Massive smuggling has sparked 3, 2000, issue of The Guardian, in re- a growing number of lawsuits. In a sponse to a Center expos released a 12-month period ending last year, few days earlier, Clarke complained Canada, the governors of Colombia, that high cigarette taxes caused Ecuador, and the European Union smuggling and added: “where gov- all filed separate racketeering suits ernments are not prepared to ad- in the United States against the dress the underlying causes of the tobacco giants. Seven nations — problem . . . we act, completely Germany, Spain, France, Italy, Bel- within the law, on the basis that gium, the Netherlands, and Finland our brands will be available along- — have since joined the EU suit. side those of our competitors in the Among the charges, the EU accuses smuggled as well as the legitimate the tobacco companies of aiding and market.” Top BAT executives, at a abetting smuggling, involvement in meeting last summer, considered organized crime, defrauding state the company’s marketing strategy treasuries of billions of dollars, laun- in light of expanding investigations, dering drug money, and committing media reports, and civil lawsuits. An wire fraud and mail fraud. industry source told the Center that In addition, criminal investiga- BAT executives discussed halting all tions have multiplied. In the United “transit” business but worried that States, several grand juries are ex- shareholders would be furious at amining the allegations of tobacco the resulting drop in profits, which company involvement in cigarette one government source estimated smuggling, including one in Raleigh, to be as high as 500 million pounds N.C., and another in New York. A (US $720 million) annually. BAT de- multi-agency investigation, coordi- cided to continue the “transit” busi- nated out of Atlanta, is also looking ness, the industry source said, but into possible corporate involvement

3Artcl i e 19 of 194 Show Contents 5Pg a e 6 of 76 Tobacco Underground: Part Two ©2009 Center for Public Integrity in cigarette smuggling and its relat- tober 27, 1999, meeting, that a law- ed crimes, such as money launder- suit against Philip Morris was “not ing, according to federal government in the Departments’ best interests.” sources. Canada, Italy, and Britain Sobalvarro noted that Philip Morris have also launched criminal inves- was lobbying Washington for a large tigations. Still, with the exception aid package for Colombia and con- of one case in Syracuse, New York, cluded the visit by threatening Arias where a unit of RJR called North- that if the lawsuit against Philip ern Brands International pleaded Morris proceeded, “there would be guilty in 1998 to smuggling-related blood.” For investigators like Hong charges, the tobacco industry has Kong’s Godfrey, there is “absolutely not faced criminal prosecution. no doubt” that BAT knew its ciga- The growing list of civil cases, rettes were being smuggled into however, could prove devastating. China and Taiwan. “[BAT is] a very Faced with possible treble dam- sophisticated company,” he said in ages under the U.S. Racketeering an interview. “There’s no reason Influenced and Corrupt Organiza- why they shouldn’t know.” Godfrey tions (RICO) Act, the tobacco com- also said he believes that bribery panies are vigorously fighting the became institutionalized at BAT- lawsuits. Already, allegations have Hong Kong. Blood, threats, bribery, surfaced in the Colombian lawsuit and corruption are no strangers to that Philip Morris is corrupting the cigarette smuggling. And tobacco legal process through threats and companies seem to know that as the destruction of documents. BAT well as anyone. n is alleged to have engaged in influence-peddling by putting political Reported by Maud S. Beelman, and government officials in Colom- Bill Birnbauer, Duncan bia on paid consultant contracts. An Campbell, William Marsden, affidavit sworn in September 2000 Erik Schelzig and Leo Sisti and by Jos Manuel Arias Carrizosa, the written by William Marsden. executive director of the Colom- The International Consortium bia Federation of Departments [or of Investigative Journalists is a states] says that Philip Morris Vice project of the Center for Public President J. Armando Sobalvarro Integrity. This investigation was tried to persuade Arias, in an Oc- supported by www.theRake.com.

Bootlegging: Often called “buttlegging,” bootlegging refers to the act of smuggling tobacco products from low-tax to high-tax jurisdictions for resale, generally by individuals or small groups.

Cigarette dumping: The practice of selling cigarettes below the price usually charged in a domestic market in order to establish brand dominance and gain competitive edge.

Contraband: Goods smuggled into or out of a country.

Counterfeit: A form of illegal manufacturing, in which products made bear a trademark used without the trademark owner’s consent.

Duty-free zone: Usually located next to an international airport or port. Goods can be sold, stored and reshipped in these zones without payment of custom duties or other direct taxes, provided they are not imported into the country where such sites are located.

Duty not paid: A company euphemism for goods that have been smuggled.

Excise tax: A tax levied on certain goods manufactured or sold within a country.

Free-trade zone: Typically sited in developing countries, free-trade zones are designed to attract business foreign investments by creating areas in which normal trade barriers and bureaucratic requirements are lowered or eliminated.

General Trade (GT): A euphemism used by tobacco companies to indicate smuggled goods.

T ax stamp: A stamp affixed to a cigarette pack to demonstrate payment of state or local excise taxes.

Trademark: An officially registered name, logo or symbol used to identify a product legally protected by its owner or manufacturer.

Transit trade: A company euphemism for moving goods between countries without payment of taxes, or smuggling.

Transshipment: the shipment of goods through one or multiple intermediate locations before reaching its final destination. Sometimes used by smugglers to obscure the origin of particular goods.

CIGA Rette PACKAGING TERMS

Container: A standard shipping unit. One 40-foot container usually contains about 1,000 master cases, or 10 million cigarettes.

Master case: Contains 10,000-12,000 cigarettes

Carton: Contains 10 packs of cigarettes.

Pack: Generally contains 20 cigarettes.

Sources: The Framework Convention Alliance: Glossary of terms in the illicit trade. Tes- timony by John W. Colledge III before the U.S. House of Representatives, Committee on the Judiciary, May 1, 2008.

3Cover Show Contents 5Pg a e 2 of 36 Tobacco Underground ©2009 Center for Public Integrity On the Web The Tobacco Underground homepage (http://www.publicintegrity.org/ investigations/tobacco/) features an interactive map of smuggling routes, key shipping points and the locations of contraband cigarette producing facilities. You can view undercover video from a facility in Kaliningrad, Russia that produces contraband Jin Ling cigarettes. http://www.publicintegrity.org/investigations/ tobacco/articles/entry/758/ Sociologist Luk Joossens is one of the world’s top experts on tobacco smuggling and was the co-author of a 1995 study that that first alerted the world to the fact that billions of cigarettes were missing and likely diverted to black markets in dozens of countries. You can see an interview with him at http://www.publicintegrity.org/ investigations/tobacco/articles/entry/760/ Jorge Abraham was a tobacco smuggler from El Paso who masterminded the trafficking of as many as half a billion cigarettes across the United States. He talks to ICIJ reporters at http://www.publicintegrity.org/investigations/tobacco/articles/entry/755/ In his more than 30 years in law enforcement, John W. Colledge investigated cigarette smuggling, narcotics, money laundering, and arms trafficking. You can hear his interview with ICIJ at http://www.publicintegrity.org/investigations/tobacco/ articles/entry/757/ Tom Zyckowski was one of four FBI agents who went undercover in parallel cigarette smuggling cases, Operation Royal Charm and Operation Smoking Dragon. Listen to him speak to ICIJ reporters at http://www.publicintegrity.org/investigations/ tobacco/articles/entry/756/ Since a series of press exposés in 2000-2001 documented the tobacco industry’s extensive history of smuggling, the industry has seemingly retreated from the practice. Yet for Britain’s largest cigarette manufacturer, Gallaher Tobacco, the smuggling may have continued. To learn more about the lawsuit brought against Gallaher, go to http:// www.publicintegrity.org/investigations/tobacco/articles/entry/759/ ICIJ has collected a wide range of online resources for those interested in learning more about tobacco smuggling. These can be accessed at http://www. publicintegrity.org/investigations/tobacco/pages/resources/ Finally, all the stories from ICIJ’s 2000-2001 investigation into tobacco smuggling are hosted on our website. To read these stories, please visit http://www.publicintegrity. org/investigations/tobacco/pages/archives/

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